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B-Ds Address Sales of Alternative Investments

Alternative investments like non-traded REITs and private placements have levied financial havoc on many investors in recent years. Now, facing pressure from regulators, some broker/dealers are making changes to how they sell these kinds of products.

Earlier this year, VSR Financial Services, Berthel Fisher & Co. Financial Services and the Cetera Financial Group Inc. announced revisions to their policy guidelines and procedures regarding sales of certain alternative investments.

As reported May 16 by Investment News, such action could lessen the amount of alternative investments that clients can hold in their accounts at any one time.

The changes particularly impact illiquid alternative investments. Because these types of investments are not traded on a national securities exchange, investors have little or no ability to sell their shares if they need immediate access to cash.

The changes that some B-Ds are making in regards to illiquid investments are not entirely unexpected. The Financial Industry Regulatory Authority (FINRA) has heightened its scrutiny of these products in recent years, issuing several bulletins warning investors about the hidden risks they may pose.

Recent news concerning alternative investments occurred in February 2013, when broker/dealer LPL Financial LLC agreed to pay restitution of $2 million to Massachusetts investors who bought seven non-traded REITs, as well as a $500,000 administrative fine. In December, Massachusetts Commonwealth Secretary William Galvin had charged LPL with failure to supervise registered representatives who sold the non-traded REITs in an alleged violation of both state limitations and the company’s rules.

For now, some broker/dealers, including VSR, are scaling back the amount of illiquid alternative investments that clients can hold in their accounts, particularly the elderly, said Don Beary, VSR chairman, in the Investment News article. “FINRA in the past year did a ‘senior sweep,’ and we’ve had guidance that we have to be careful about what seniors buy,” he said.

Maddox Hargett & Caruso continues to investigate sales of non-traded REITs on behalf of investors. If you believe you suffered losses in a non-traded REIT investment because your broker/dealer or financial adviser misrepresented certain facts, please contact us.


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