securities arbitration

Published on: January 18, 2018

FINRA Issues 2018 Regulatory Guidance on Securities Backed Lines of Credit

financial charts and stockbroker On January 8, 2018, the Financial Industry Regulatory Authority (“FINRA”) published its Annual Regulatory and Examination Priorities Letter (“2018 Letter”). The purpose of this letter is to highlight certain issues of importance to FINRA in the upcoming year, and serves as a useful guidepost for industry professionals and investors, alike. Included among the areas of concern addressed in the 2018 Letter is the increased prevalence of so-called securities backed lines of credit, or SBLOCs.

Given the current bull market that is currently approaching nine (9) years in age, it should come as no surprise that many brokerage firms and their registered representatives have heavily marketed SBLOCs to their clientele. The sales pitch in a rising market such as this is relatively simple: you may tap into the value of your investment portfolio in order to readily access cash in the form of an SBLOC, without the need to sell out of any investment holdings, thereby ensuring continued upside appreciation in the value of your investment portfolio. Such a marketing pitch, while logical, often downplays the risks associated with a SBLOC and its use of leverage against collateral that can rapidly deteriorate in value.

Put simply, SBLOCs are non-purpose in nature, meaning that such loans are not used to purchase more securities, and are thus distinguishable from traditional margin loans. Despite the fact that SBLOCs are non-purpose — and may be utilized for any number of ends, including for example creating liquidity for the purchase of a home, paying tuition, or financing the purchase of a car — FINRA has recently expressed concern over the risks associated with SBLOCs.

Published on: December 13, 2017

FINRA Bars Broker for Failure to Produce Documentation Concerning Annuity Sales

by InvestorLawyers

stock market chart As part of its ongoing regulatory focus on variable annuity (“VA”) sales misconduct, the Financial Industry Regulatory Authority (“FINRA”) has recently barred a former Next Financial Group (“Next Financial”) (CRD# 46214) broker. Registered representative JoeAnn Walker (CRD# 2210194) was previously affiliated with Commonwealth Financial Network (1998-2006), LPL Financial LLC (2006-2015), and most recently, NEXT Financial – until her termination by her former employer in October. According to FINRA, it was conducting an inquiry into whether Ms. Walker was engaging in possible unsuitable VA sales practices.

As we have discussed in several recent blog posts, FINRA has ramped up its efforts in recent months to target VA sales practice misconduct. Since handing down a $20 million fine against MetLife Securities, Inc. (“MSI”) in May, 2016 (in addition, FINRA ordered MSI to pay $5 million to customers in connection with allegations of making negligent material misrepresentations and omissions on VA replacement applications), FINRA enforcement has continued to fine numerous member firms and investigate certain financial advisors concerning variable annuity sales practice issues.

In particular, FINRA has targeted brokers recommending unsuitable VAs, in the first instance, as well as recommending the sale of one VA for another in order to generate commissions (a practice akin to churning, and commonly referred to as “switching”). According to publicly available information through FINRA, Ms. Walker has three prior customer complaints, each of which resulted in a settlement. Most recently, in March 2016, a customer initiated a dispute against Ms. Walker, alleging “… unauthorized sales of various stocks, unauthorized and unsuitable purchases of variable annuities and unauthorized mutual fund switches between June 2014 and June 2015.” That FINRA proceeding alleged damages of $208,764 and ultimately settled for $175,000.

Published on: November 20, 2017

Investing in Non-Traded BDCs May Get Even Riskier

by InvestorLawyers

On November 15, 2017, H.R. Bill 4267 (the “Bill”), entitled the Small Business Credit Availability Act (the “Act”), passed the House Financial Services Committee by an overwhelming 58-2 vote. This Bill seeks to amend the Investment Company Act of 1940 (’40 Act), specifically the regulations currently governing business development companies (“BDCs”). In recent years, financial advisors have increasingly recommended BDCs, allowing for Mom and Pop retail investors to participate in private-equity-type investing. Many income-oriented investors are attracted to BDCs because of their characteristic enhanced dividend yield.

As an investment vehicle, BDCs were first made available pursuant to the Small Business Investment Incentive Act of 1980, as a result of a perceived crisis in the capital markets. At that time, small businesses were encountering severe difficulties in accessing credit through traditional means. BDCs are a special type of closed-end fund designed to provide small, growing companies with access to capital.

BDCs are structured as hybrid between an operating company and an investment company under the ’40 Act. Regulated as an investment company, BDCs are required to file periodic reports under the Securities Exchange Act, and further, are subject to a number of regulatory requirements. Three of the most notable regulations currently governing BDCs are as follows:

Published on: October 4, 2017

Investors in Strategic Realty Trust May Have Arbitration Claims

by InvestorLawyers

Strategic Realty Trust (“SRT,” formerly known as TNP Strategic Retail) is a San Mateo, CA based non-traded real estate investment trust (“REIT”) that invests in and manages a portfolio of income-producing real properties including various shopping centers located primarily in the Western United States.

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Market Analyze.

Over the past several years, many retail investors were steered into investing in non-traded REITs such as SRT by their broker or money manager based on the investment’s income-producing potential. Unfortunately, many investors were not informed of the complexities and risks associated with non-traded REITs, including the investment’s high fees and illiquid nature. Currently, investors who wish to sell their shares of SRT may only do so through direct redemption with the issuer or by selling shares on an illiquid secondary market, such as Central Trade & Transfer.

Published on: October 4, 2017

Lightstone Value Plus REIT V and American Finance Trust Investors May Have Arbitration Claims

by InvestorLawyers

Investors in American Finance Trust and Lightstone Value Plus REIT V may have viable arbitration claims before the Financial Industry Regulatory Authority (FINRA) if a stockbroker or investment advisor made an unsuitable recommendation to the investor to purchase them, or made a misleading sales presentation in recommending them.

Publicly registered non-exchange traded REITs like American Finance Trust and Lightstone Value Plus REIT V are complex investment vehicles that carry substantial risk, including significant fees and lack of liquidity (often making redemption difficult for a shareholder seeking to exit an investment). Many retail investors are steered into purchasing non-traded REITs upon the recommendation of their broker or financial advisor who will typically tout the investment’s income component to their clients seeking an income stream. Unfortunately, many investors who purchase shares in non-traded REITs are not fully informed of the many complexities and risks associated with such an investment.

American Finance Trust (“AFT”) is a non-traded REIT that was formed in January 2013 and subsequently launched by American Financial Advisors, LLC. More recently, in February 2017, AFT (with $2.1 billion in assets) and American Realty Capital-Retail Centers of America (with $1.25 billion in assets) announced shareholder approval for a merger of the two non-traded REITs.

Published on: June 11, 2015

UBS Loses FINRA Arbitration Involving Puerto Rico Closed-End Fund (CEF)

by InvestorLawyers

A FINRA arbitration panel awarded $1 million to an investor whose portfolio was over-concentrated in UBS Puerto Rico closed-end bond funds. The 66 year-old conservative investor reportedly “lost $737,000 of his nearly $1 million portfolio when the value of UBS’ Puerto Rico municipal bond funds collapsed in the fall of 2013.”

When the client expressed his concern about his declining account, he was told “even a skinny cow could give milk.” The arbitration panel wrote that the investor’s portfolio was “clearly unsuitable” and provided a lengthy explanation for their award, which pointed the finger at UBS’s sales practices and alleged that brokers were under pressure to sell the closed-end funds and keep clients in them. The arbitration panel wrote that “Claimant’s lifetime pattern has been one of frugality, saving and employment of resulting capital and his own labor in business opportunities that he understands can earn a good return.”

UBS was ordered to pay $400,000 to buy back the investor’s portfolio and pay $600,000 in compensatory damages. The investor’s request for $1 million in punitive damages was reportedly denied by the arbitration panel. The FINRA award is accessible here ubs puerto rico.

Published on: March 21, 2012

Investors of Guggenheim Shipping ETF Could Recover Losses Through Securities Arbitration

by InvestorLawyers

Investors who suffered losses as a result of their broker’s recommendation of Guggenheim Shipping ETF are seeking the help of investment fraud lawyers in recovering their losses. Guggenheim Shipping ETF is a targeted ETF that tries to track the shipping industry. In general, the shipping industry can be a leveraged play — when there is a strong demand for freight transportation — on the global economy. However, as a result of the decreasing demand for raw materials from emerging markets, the need for shipping services has decreased. Reportedly, the Guggenheim Shipping ETF is down 46 percent, which is bad news for many investors. Luckily, investors who suffered significant losses may have a valid securities arbitration claim.

Investors of Guggenheim Shipping ETF Could Recover Losses Through Securities Arbitration

Brokers, and brokerage firms, have a fiduciary duty to their clients. They must research an investment prior to making a recommendation to an investor, to establish that the investment is suitable. It must be appropriate for each individual investor, taking into consideration the investor’s investment objectives, investment experience, net worth and age. The Financial Industry Regulatory Authority has a dispute resolution form where investors can settle disputes with their brokerage firms relating to unsuitability and other forms of stock broker fraud.

Brokers have been known to sell ETFs and ETNs as conservative ways to track a sector of the market, or the market as a whole. However, complicated trading strategies are necessary to accomplish this, and using these investments to track a sector of the market may or may not be a conservative trading strategy. This depends on the sector of the market and assets in the account relative to the investment’s concentration level.

Published on: March 15, 2012

Investors of C-Tracks ETN Citi Volatility Index Total Return Could Recover Losses Through Securities Arbitration

by InvestorLawyers

Investors who suffered losses as a result of their broker’s recommendation of C-Tracks ETN Citi Volatility Index Total Return are seeking the help of investment attorneys in recovering those losses. Reportedly, a unique methodology has caused a severe decline in the Volatility ETFdb Category. The C-Tracks ETN Citi Volatility Index Total Return combines short exposure to the S&P 500 Total Return Index to directional exposure of large cap stocks through third and fourth month futures contracts positions on the CBOE Volatility Index. When volatility spiked over the summer, this strategy worked well. However, CVOL has struggled over the long-term. Reportedly, the C-Tracks ETN Citi Volatility Index Total Return is down 48 percent, the most severe decline year-to-date.

Investors of C-Tracks ETN Citi Volatility Index Total Return Could Recover Losses Through Securities Arbitration

Luckily, investors who suffered significant losses may have a valid securities arbitration claim.

Brokers, and brokerage firms, have a fiduciary duty to their clients. They must research an investment prior to making a recommendation to an investor in order to establish that the investment is suitable. It must be appropriate for each individual investor, taking into consideration the investor’s investment objectives, investment experience, net worth and age. The Financial Industry Regulatory Authority has a dispute resolution form where investors can settle disputes with their brokerage firms relating to unsuitability and other forms of stock broker fraud.

Published on: March 12, 2012

Investors of Mars CDO I Could Recover Losses Through Securities Arbitration

by InvestorLawyers

Investment attorneys are seeking Merrill Lynch customers who purchased Mars CDO I, as they could potentially recover their losses through securities arbitration. Mars CDO I was sold to institutional and high net worth customers of Merrill Lynch. The Mars CDO I was underwritten by Merrill Lynch in 2007. However, each of the 30 CDOs underwritten by Merrill Lynch in 2007 was either in technical default, had its best-rated portion cut to junk, was in danger of being liquidated or was in the process of being liquidated by the summer of 2008. Stock fraud lawyers are now investigating how Mars CDO I was marketed and sold by Merrill Lynch.

Investors of Mars CDO I Could Recover Losses Through Securities Arbitration

Securities that are backed by underlying pools of loans or bonds are CDOs, or collateralized debt obligations. While these investments are inherently risky, they are relatively common among “qualified investors.” Currently, stock fraud lawyers are also investigating if Merrill Lynch properly disclosed the CDO risks to investors in the sale of Mars CDO I. Furthermore, the value of Mars CDO I may have been inflated and over-stated by Merrill Lynch. Many investment attorneys believe that Merrill Lynch either knew or should have known the 2007 CDO deals were bad in the existing mortgage market conditions, given the poor performance of the CDOs.

On January 31, 2012, a Financial Industry Regulatory Authority Arbitration Panel awarded $1.38 million to Bobby Hayes, an investor who purchased Collateralized Debt Obligations from Merrill Lynch in 2007. For more on this case, see the previous blog post, “After Securities Arbitration, Merrill Lynch Must Pay $1.4 Million to Investor Over CDO Loss.”

Published on: March 9, 2012

Investors of Chase Floating Rate Loan Funds and UITs Could Potentially Recover Losses

by InvestorLawyers

Investors of Chase Investment Services Corporation’s unit investment trusts and floating rate loan funds may be able to recover losses through securities arbitration. Chase Investment Services’ sales practices involving these securities are currently being investigated by investment attorneys.

Investors of Chase Floating Rate Loan Funds and UITs Could Potentially Recover Losses

In a recent Financial Industry Regulatory Authority (FINRA) ruling, Chase Investment Services was ordered to reimburse customers over $1.9 million in losses. These losses were incurred because of the unsuitable recommendation of UITs, or unit investment trusts, as well as floating loan funds. In addition to the $1.9 million reimbursement, Chase was fined $1.7 million. According to FINRA’s investigation, unsophisticated customers with conservative risk tolerances were recommended UITs and floating rate loan funds by Chase brokers. In addition, the brokers did not have reasonable grounds for belief that these recommendations were suitable for their customers. Furthermore, Chase failed to provide its brokers with adequate guidance and training regarding the suitability and risks of floating rate loan funds and UITs.

As a result of nearly 260 unsuitable recommendations of UITs made by Chase brokers, $1.4 million in losses were incurred by unsophisticated investors with conservative investment portfolios. Investors also suffered losses as a result of floating rate loan funds, which were subject to substantial credit risks. In addition, some of the funds may be illiquid. Investor losses amounting to almost $500,000 because of the unsuitable recommendations of floating rate loan funds remain unreimbursed.