Secretary of the Commonwealth William Galvin, the securities regulator in Massachusetts, has launched an investigation into sales practices in connection with private placements.
The regulators said that they launched the sweep after a recent Wall Street Journal investigation found that firms who employ agents with disciplinary history are selling billions of dollars per year in private company stakes and are often targeting seniors.
The sweep involves 10 Massachusetts-based broker-dealers which sell private placements and have 15 percent or more of agents with current disciplinary incidents. In the case of one firm, one-third of its current registered agents had been red-flagged.
“Private placements are risky investments that reward the salesperson handsomely with high commissions,” said Galvin. “Firms offering these to the public, especially seniors, have an obligation to see that they are sold to benefit the investor, not the broker. Individuals with a history of disciplinary actions magnify the risk of unsuitable sales in connection with private placements.”
Massachusetts regulators began looking into firms and representatives with disciplinary reports on file two years ago, when the securities division surveyed more than 200 firms regarding their hiring and disciplinary practices.
They found that over a two-and-a-half-year period, more than 18 percent of the reps that were hired by the surveyed firms had current disclosure incidents. Further, they found that more than 90 percent of broker-dealer agents with disclosed disciplinary incidents were not subject to enhanced supervision.
Inquiry letters have been sent to Arthur W. Wood Company, Santander Securities, LPL Financial, U.S. Boston Capital Corporation, Bolton Global Capital, Advisory Group Equity Services, Moors & Cabot, Detwiler Fenton & Co., BTS Securities Corporation, and Winslow, Evans & Crocker.
ADISA, the Alternative & Direct Investment Securities Association, was critical of the Wall Street Journal article cited by Galvin as the impetus for his investigation, claiming that its analysis missed the mark by “effectively comparing apples to oranges.”
The trade group said that, “Reg D private placements are complex investment offerings that are statutorily limited to high net worth accredited investors who are more financially sophisticated, wealthier and able to bear the higher economic risk that comes with investing in unregistered securities. These offerings are generally uncorrelated to the public markets and offer valuable diversification benefits and potentially higher yields that many wealthier investors seek to better balance their portfolios.”
They argued that such alternative investments are extensively regulated and require “suitability tests, broad disclosures, due diligence analysis and a host of other complex steps that are not present in the sale of the vast majority of investment products.”
“Typical simple investments, such as publicly traded securities, treasuries, bonds, and similar products avoid all of the potential pitfalls that come with the sale of private placements,” said ADISA. “As a result, there will logically be a disproportionate number of complaints brought in relation to these complex investment products.”