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Alternative investments continue to garner the wrath of regulators and more trouble for broker/dealers.
Last week, the Financial Industry Regulatory (FINRA) signed off on a $550,000 fine against broker/dealer VSR Financial Services and a $10,000 fine and 45-day suspension of VSR’s chairman, Don Beary. As reported May 17 by Investment News, Beary was suspended from acting as a principal over that time but is not suspended from the industry.
VSR is known in the industry for specializing in selling alternative investments.
According to FINRA, VSR failed to adequately watch over concentrated client positions of alternative investments. In a letter of acceptance, waiver and consent dated May 15, FINRA alleged that from 2005 to 2010, VSR and Beary “failed to adequately implement the firm’s supervisory system pertaining to its supervision of concentrated positions in alternative investments through the use of a ‘discount program.’” “That program artificially reduced the amount a customer had invested in a particular investment for purposes of calculating concentration.”
FINRA’s letter went on to say that, “when calculating concentration at certain risk levels, VSR reduced the risk ratings on many investments, making the ratings inconsistent with the risks stated in the offering documents related to the investments.”
VSR Financial has 460 registered reps. Between January 2006 and September 2010, 20% to 45% of the firm’s revenue was tied to sales of non-conventional investments, FINRA says.
In 2012, VSR generated $98.1 million in total revenue, according to a survey by Investment News of independent broker/dealers.
Recently, VSR announced that it had instituted changes to the firm’s policies and practices for sales of alternative investments. Specifically, VSR scaled back the amount of illiquid alternative investments that could be held in client accounts and lessened the amount investors 70 years of age or older could own. Previously, VSR clients could have 40% to 50% of their accounts in illiquid investments. That has been reduced to 35%, with new limits for older clients.