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.
In the 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 liquidity needs.
“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.