Regulators continue their crack down on the sale of alternative investments
in a recent case against a mid-size broker-dealer in Kansas.
In a disciplinary action filed earlier this month, the Financial Industry
Regulatory Authority (FINRA) charged
VSR Financial Services, Inc. and its chairman, Don Beary, with failing to supervise two representatives who made
unsuitable recommendations of non-conventional investment products to six customers.
The unsuitable recommendations resulted in increased non-conventional
investment sales for VSR and millions of dollars in losses for the investors.
action against VSR Financial,
FINRA noted that its member firms have a duty to ensure non-conventional
investments are suitable for investors based on the client’s financial
status, tax status, investment objectives, portfolio concentration, and
“Non-conventional instruments lack the liquidity associated with
conventional equity and
fixed income instruments and have risks not present with conventional investments.
In addition, due to the alternative nature of the investments, it is often
more difficult for a retail investor to understand the risks and unique
features of the non-conventional investment,” wrote FINRA in the
action, adding that regulatory rules caution that “non-conventional
instruments may be suitable of recommendation only to ‘a very narrow
band of investors capable of evaluating and being financially able to
bear’ the risks.”
The representatives’ recommendations of the products were allegedly
unsuitable due to concentration problems in the affected investors’ accounts.
According to FINRA, VSR was using a “discount program” to determine
client concentrations in alternative investments.
This program allegedly “artificially reduced the amount a customer
had invested in a particular investment for purposes of calculating concentration.
In addition, when calculating concentration at certain risk levels, VSR
reduced the risk ratings on many investments making the ratings inconsistent
with the risk stated in offering documents related to the investments.”
VSR already has agreed, without admitting or denying the allegations, to
pay a $550,000 fine to settle FINRA’s charges. Beary has agreed
to pay a $10,000 fine and to be suspended from acting as a principal of
the firm for a period of 45 days.
Click here to learn more about
VSR Financial case, including the adjustments VSR has said it has made in response to the case.
Watch the video below to learn more about alternative investments.