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Category Archives: CMOs, Collateral Mortgage Obligations

Are Brokers Feeling Pressure to Push Alternative Investments?

The past year has been a good one for big retail brokerages, but many brokers aren’t viewing the increased revenues as a sign to sit back and relax. Instead, some say they’re feeling pressure to keep those revenues up by touting investments with higher commissions and fees. And for investors, that could mean added risks.

As reported Feb. 25 by the Wall Street Journal, more of the larger retail brokerage firms now have an eye on promoting financial products that generate greater profit margins. According to a broker at UBS Wealth Management Americas in New York, there has been a big push to put client money in alternative investments, as well as the lending business.

“Alternative investments are some of the biggest profit generators for the firm,” he said in the WSJ story. Asset-based lines of credit – a relatively easy way to earn a few percent in interest – also are popular.

Part of this newfound encouragement is tied to the way in which UBS pays its brokers. As reported in the Wall Street Journal article, UBS recently fine-tuned its basic formula for paying brokers a percentage of the revenue they produce to include incentives for selling products such as mortgages and credit lines. The changes went into effect in 2013.

Similar formulas, or pay grids as they’re called, are used at Morgan Stanley Wealth Management and Merrill Lynch, which also reward bonuses to brokers with growing loan-based business.

According to the WSJ story, financial advisers at Merrill Lynch also feel the continued push to get more assets into value-based models – i.e. those that charge clients a fee for advice and a financial plan.

Wachovia Securities Fined $1.4 Million By FINRA

The Financial Industry Regulatory Authority (FINRA) announced on June 25 that it had fined Wachovia Securities, LLC of St. Louis $1.4 million for the firm’s failure to deliver prospectuses and product descriptions to customers who purchased various investment products from July 2003 through December 2004. FINRA also cited Wachovia for related supervisory failures.

Specifically, FINRA found widespread deficiencies relating to the delivery of prospectuses for certain classes of securities, including exchange-traded funds (ETFs), collateral mortgage obligations (CMOs), auction-rate market preferred securities, corporate debt securities, preferred stocks, mutual funds, alternative investment securities, equity syndicate initial public offerings (IPOs) and secondary purchases of equity non-syndicate initial public offerings.

FINRA’s investigation of Wachovia showed that it failed to deliver the required prospectuses to customers in approximately 6,000 of approximately 22,000 transactions occurring between July 2003 and December 2004. The market value of the 6,000 transactions was approximately $256 million, according to FINRA.

At the time the activity at issue took place, Wachovia Securities, LLC was a subsidiary and non-bank affiliate of Wachovia Corporation. On Jan. 1, 2009, Wachovia Corporation merged with Wells Fargo & Company.

SEC Files Fraud Charges Against Former Brookstreet Securities Brokers

The June 2007 meltdown of Brookstreet Securities may finally produce some justice for more than 750 clients who were left with questions and massive financial losses because of bad bets placed by the Irvine, California-based brokerage on risky collateral mortgage obligations (CMOs).

On May 28, 2009, the Securities and Exchange Commission (SEC) filed fraud charges against 10 former Brookstreet brokers for allegedly disguising the risks of the CMOs and portraying them as conservative, fixed-income investments. The investments were later heavily margined, which ultimately caused Brookstreet’s clients to suffer millions of dollars in losses. Meanwhile, the SEC contends the brokers who sold the risky investments as conservative products pocketed millions of dollars in commissions and salaries.

Seven other brokers from the now-defunct Brookstreet firm face similar charges by the Financial Industry Regulatory Authority (FINRA). 

Before it was forced to close its doors two years ago, Brookstreet Securities touted itself as a new kind brokerage firm dedicated to personalized service and innovative technology – a place where clients would find virtually unlimited investment choices designed to grow and protect their savings.

Far from growing or protecting their savings, many clients discovered an altogether different scenario in 2007 after the value of their investments in collateral mortgage obligations was heavily marked down, leaving them with little recourse. They either had to meet immediate and large margin calls or lose their entire investments.

As reported May 28, 2009, by the Registered Rep, the SEC complaint alleges that the 10 brokers named in its case earned $18 million in commissions and salaries from CMO sales while investors suffered more than $36 million in losses on their investments. 

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