FINRA in a statement today, announced that it has fined Berthel Fisher (Berthel) and an affiliate, Securities Management & Research, $775,000 for failure to supervise sales of non-traded REITs and certain ETF products. In addition, Berthel must hire an independent consultant to improve its supervisory procedures for all alternative investments.
“A strong culture of compliance is an essential element of the proper marketing of complex products,” said Brad Bennett, FINRA’s Executive Vice President of Enforcement in a statement.
Broker dealers are responsible for sales practices of non-traded REITs and other alternative investments, and ensuring that their financial advisors have the tools and resources available to them to fully understand these products.
Bennet continued, “Berthel’s supervision of the sales of non-traded REITs, inverse ETFs and other products fell short of this standard, as it failed to ensure that its registered representatives understood the unique features and risks of these products before presenting them to retail clients.”
According to FINRA, “from January 2008 to December 2012, Berthel Fisher had inadequate supervisory systems and written procedures for sales of alternative investments such as non-traded REITs, managed futures, oil and gas programs, equipment leasing programs and business development companies.”
The IBD failed to accurately calculate clients’ concentration levels into alternative investments, which lead to failures preventing over allocations into the asset class. Most broker dealers have an alternative investment maximum concentration, sometimes 10 to 20% of all investable assets.
Many states have maximum allocation limits to alternative investments as well. Berthel failed to train its advisors on these restrictions. Just recently, AI Insight, Inc. and the IPA announced that the Daily Blue Sky Report would be available to members of the trade group. This report, which details state limits on alternative investments, is one tool that can help IBDs and advisors keep track of the various state restrictions.
Berthel and the affiliate consented to the entry of FINRA’s findings without admitting or denying charges.