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Home > Blog > Monthly Archives: August 2016

Monthly Archives: August 2016

FINRA Targets Business Development Companies (BDCs)

The Financial Industry Regulatory Authority (“FINRA”) has launched an examination sweep of non-traded business development companies (“BDCs”), the latest alternative investment product to receive increased scrutiny from the broker-dealer regulator.

An examination letter, posted on FINRA’s website on August 4, 2016, stated that “FINRA is conducting an inquiry with respect to non-traded Business Development Companies (BDCs)” and it requests that brokerage firms provide documents and information to the regulator “by no later than September 9, 2016.”

Non-traded BDCs are investment vehicles that typically make loans to small and medium-size companies with less than stellar credit. They reportedly attracted $22 billion from investors over the past several years, as interest rates near zero sent investors in search of higher yields.

Many of the brokerage firms that are selling non-traded BDCs to their retail clients had previously been involved with the marketing of non-traded Real Estate Investment Trusts (“REITS”) – another high commission alternative product with a questionable track record and limited liquidity.

Among the documents and information that brokerage firms have to provide to FINRA in response to this examination sweep are “the firm’s due diligence procedures and, if not already included in the due diligence procedures, a written description of the due diligence that the firm conducts of the BDC initially and on an ongoing basis as well as a written description of the due diligence that the firm conducts of participating broker-dealers with which the firm has a selling agreement.”

An article in the Investment News (“FINRA Launches Exam Sweep of Business Development Companies”), quoting a high-ranking FINRA official, indicates that “the regulator is targeting the increasingly popular BDCs to assess how they’re marketed and sold” and that “given the complexity and high-risk nature of this product, there is concern that retail customers may not fully understand the risks and the potential impact on their portfolios” of this investment product.

A copy of the firm’s due diligence procedures and, if not already included in the due diligence procedures, a written description of the due diligence that the firm conducts of the BDC initially and on an ongoing basis as well as a written description of the due diligence that the firm conducts of participating broker-dealers with which the firm has a selling agreement.

If you are an individual or institutional investor who has any concerns about your investment in any Business Development Company investment, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).


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