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Sales of Complex Investments to Elderly Lead to Inquiry

Massachusetts Secretary of the Commonwealth William F. Galvin has subpoenaed 15 brokerage firms as part of a new investigation into the marketing and sales of alternative financial investments to the elderly.

Galvin is asking the firms – including LPL Financial, Merrill Lynch, and Morgan Stanley – about the ways in which they have sold “high-risk, esoteric products” to older citizens.

Being on the list of banks and brokerages receiving subpoenas “is not an indication of wrongdoing at this time,” according to Galvin.

Regulators have previously voiced concern about the increasing number of opaque and risky investments that are being pitched to unsophisticated investors. In many cases, the products offer higher commissions than traditional financial products like mutual funds, thus making them more appealing for brokers to sell.

“These things are accidents waiting to happen when they are sold to inexperienced investors,” Galvin said in a statement on Wednesday.

Massachusetts regulators recently collected $11 million in fines from five broker/dealers for selling illiquid real estate investment trusts, or non-traded REITs, to investors in that state. Unlike publicly traded REITs, non-traded REITs are not easy to sell when investors wants to cash in their investment.

In the latest inquiry into the 15 firms, Galvin’s office is looking into such investments as structured products, oil and gas partnerships and private placement deals. All of these investments disclose less public information than public stocks and bonds. Moreover, sales of these products have become more prominent following the financial crisis, as many older Americans attempt to recoup the losses they suffered in their retirement portfolios.

Richard G. Ketchum, chief executive of the Financial Industry Regulatory Authority (FINRA), said in a recent speech that his organization had noticed an uptick over the past two years in “the sale of complex products and speculative products with low liquidity, to unsuitable customers by financial advisers who often don’t fully understand the risks of the products.”

As reported by the New York Times, the Massachusetts investigation began on the same day that the Securities and Exchange Commission (SEC) agreed to lift its ban on public advertisements for some of the same complex investments Galvin is examining. Many, including Galvin, have criticized the SEC’s decision, arguing that even with advertising banned, too many unsophisticated investors have ended up learning about and buying products that are unsuitable for their investment goals.



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