May 8, 2015

LPL Financial: What Customers Need to Know About Restitution

On May 6, 2015, LPL Financial reached a settlement with the Financial Industry Regulatory Authority ("FINRA") agreeing to pay FINRA a $10 million fine and make restitution payments totaling $1.7 million to a select group of customers who were sold leveraged and inverse exchange traded funds ("ETFs").

Restitution Will be Limited to 327 Customer Accounts

Only customers who purchased certain ETFs are entitled to receive any restitution under the terms of the settlement with FINRA. A total of 327 customer accounts are covered under the restitution program. Payments will range from a high of $83,034.97 to a low of $1.02 per account. LPL has 120 days to provide regulators with proof that payment has been made.

Restitution Will Not Cover Other Investment Losses

LPL's regulatory troubles reached critical levels during a period of time when the firm more than doubled in size. LPL Financial is now one of the nation's largest independent broker/dealers and is a leading distributor of financial products. Along the way, LPL has received numerous regulatory fines and penalties--all relating to the firm's failure to properly supervise their financial advisors.

The latest $10 million fine involves widespread supervisory failures by LPL. The $1.7 million in restitution offered to select customers looks paltry compared to the $10 million fine FINRA is collecting for itself. The seriousness of this disciplinary action recognizes that LPL's supervisory problems go well beyond the sale of risky ETFs in a handful of customer accounts. As the old saying goes: "Where there's smoke, there's fire." In LPL's settlement with regulators, FINRA lists numerous examples of LPL's supervisory deficiencies, including:


  • Failing to monitor the length of time leveraged and inverse ETFs were held in customer accounts even though such funds are designed as short-term investments.

  • Failing to deliver prospectuses to customers.

  • Permitting the sale of ETFs by financial advisors who had not taken the mandatory training on the risk of these products.

  • Failing to supervise the sale of variable annuity contracts and mutual funds.

  • Failing to supervise the sale of non-traded real estate investment trusts ("REITs").


Arbitration: Another Avenue of Relief

Restitution is not the only relief available to LPL customers. For example, our securities law firm recently filed a FINRA arbitration claim against LPL on behalf of a woman who had invested in ETFs as well as several other risky investments offered by LPL that are not covered under the restitution plan. The lawsuit against LPL Financial seeks to recover losses over and above any amount that the customer receives through restitution. The bottom line: LPL customers need to carefully weight their options and, when in doubt, get in touch with an experienced securities lawyer.

May 6, 2015

LPL Financial Ordered to Pay $10 Million Fine and $1.7 Million in Restitution to Customers for Supervisory Lapses

Thumbnail image for lpl.jpgToday, the Financial Industry Regulatory Authority ("FINRA") reached a settlement with LPL Financial LLC totaling $11.7 Million over multiple failures in the firm's supervision of customer transactions involving non-traditional exchange traded funds ("ETFs"), variable annuities, mutual funds and non-traded real estate investment trusts ("REITs").

As part of the settlement, LPL will be required to pay $1,664,592.04 million in restitution, plus interest, to customers affected by the firm's failure to supervise the sale of non-traditional ETFs. FINRA has stepped up its enforcement efforts over the sale of non-traditional ETF such as leveraged and inverse ETFs, which are complex and risky investments that we have covered at length in several blog posts. Click here for more information about leveraged and inverse ETFs.

LPL has 120 days to locate and provide proof of payment to all affected customers. According to the settlement, a total of 327 unidentified customer accounts are entitled to receive payments ranging from $1.02 to $83,034.97 per account.

Related Blog Posts:

Alcala Law Firm Files FINRA Arbitration Claim Against LPL Financial Over Risky Investments

May 1, 2015

Alcala Law Firm Files FINRA Arbitration Claim Against LPL Financial Over Risky Investments

The Alcala Law Firm, a California-based securities law firm, has filed a securities arbitration claim against LPL Financial before the Financial Industry Regulatory Authority (FINRA) involving the sale of risky and unsuitable investments in a managed account causing a customer to suffer significant losses between 2011 and 2013--a period of time when the overall stock market enjoyed positive returns. The customer's investments included an inverse exchange traded fund ("ETF"), a bear fund that bet against the market and several gold funds.

In related news, on May 6, 2015, LPL was fined $10 Million by FINRA for widespread supervisory violations and ordered to pay $1.7 in restitution to customers who were sold leveraged and inverse ETFs. Click here for related blog post. LPL, headquartered in Boston, has grown from approximately 8,300 registered representative in 2007 to 18,433. However, LPL's rapid growth has created problems with regulatory authorities who have repeatedly fined the firm for failure to supervise their growing legion of financial advisors. LPL paid disciplinary fines totaling $2.95 million in 2014 and $8 million (plus $2 million in restitution) in 2013 for supervisory lapses.

March 10, 2015

ALF Files Elder Abuse Claim Against Cantella & Co.

The Alcala Law Firm has filed a securities arbitration claim before the Financial Industry Regulatory Authority (FINRA) against Cantella & Co., Inc. alleging elder financial abuse on behalf of a 68-year-old woman diagnosed with dementia. Also named as respondents in the arbitration proceeding where two other brokerage firms where the customer previously maintained accounts as she followed her stockbroker Dennis ("Deno") Webb from firm to firm. The other respondents named in the claim include: MML Investors Services, Inc. and optionsXpress, Inc. (a subsidiary of Charles Schwab & Co. that was formerly doing business as brokersXpress LLC) This investigation is still ongoing. For further information, please contact us.

January 8, 2015

More Accurate Share Price Reporting to be Required for Non-Traded REITs and DPPs

For many financial consumers, the new rule changes requiring stockbrokers to provide more reliable pricing information for REITs (real estate investment trusts) and DPPs (direct participation programs) will be a case of "too little, too late." After the market crash of 2008, our securities law firm was inundated with inquiries from investors who had purchased non-traded REITs offered through real estate companies such as American Realty Capital, Berhinger Harvard, Inland American, KBS Real Estate-typically at a price of $10.00 per share. In many cases, the $10 per share price never changed from month-to-month, despite the fact that the real estate market was suffering catastrophic losses, giving investors a false sense of security about their REITs value.

Starting in April 2016, rule changes designed to better protect financial consumers will go into effect. Although the new changes won't put any restrictions on the sale of REITs and DPPs to financial consumers, the changes will require greater disclosure of the per share estimated value of the REIT or DPP. A summary of the rule changes is provided at the end of this blog post.

Investors Should Proceed With Caution When Considering a Non-Traded REIT Investment

While FINRA is taking steps to better protect investors, investors should still be careful and follow the tips FINRA has created for when an investor is considering unlisted REITs.
Investors should avoid putting their entire investment into one REIT or the same family of REITs because their initial investment is not guaranteed and may increase or decrease in value. Investing proceeds from one unlisted REIT to another should be carefully considered because it may only be in the best interest of the sales representative who receives a commission for the transaction.


  • Investors should not base their decision to invest on the current distributions of an unlisted REIT because they are not guaranteed. REIT distributions can be suspended or stopped completely because they can be partially or entirely funded by cash from investor capital or borrowings.

  • If an investor reinvests their distributions they should be aware that their reinvestments may be illiquid for a long period of time because they are subject to the same redemption policies as other investments.

  • Getting money out of an unlisted REIT can be extremely difficult because the redemption policies can change at any time. Therefore investors that will want their money back in the near future should avoid unlisted REITs.

  • As an investor do not rely on claims that an unlisted REIT is going public because the process is lengthy and may actually never happen. If the REIT does go public then the trade price could be less than its current valuation.

  • It is in the best interest of older investors to not invest a large portion of their retirement income into an unlisted REIT.


Even though FINRA is taking steps to improve the transparency of unlisted REITs the investment itself has not changed and is still inappropriate for most conservative or moderate risk investors.

Overview of FINRA/NASD Rule Changes

[1] Financial Industry Regulatory Authority (FINRA) Rule 2310

To help increase the transparency of unlisted REITs FINRA amended Rule 2310(b)(5) to prevent any member from participating in a public offering of a REIT or DPP unless the issuer has disclosed three things:


  • The DPP or REITs per share estimated value in the DPP or REIT periodic reports

  • An explanation of how the value was determined; and

  • The date of the valuation


The amended Rule 2130(b)(5) also requires the issuer of the DPP or REIT offering to include in each customer's account statement the per share estimated value that is based on the assets and liabilities of the DPP or REIT and determined by or with the help of a third party valuation expert. The issuer must also provide a written opinion or report explaining the scope of the review and the valuation method used.

[2] National Association of Securities Dealers (NASD) Rule 2340

The amendments to NASD Rule 2340(c) require firms to disclose how much money is taken out for fees and commissions for each investment by including them in the calculations of the share value. To calculate the new share value the amendment provides two different methods: a net investment approach or an appraised value method.


  • Net Investment: Firms must disclose that part of a customer's distribution includes a net investment and that the net investment reduces the estimated per-share value on their account statement. The valuation is based on the percentage of the amount available for investment. If there is no amount available for investment provided then the firm must provide another equivalent disclosure.

  • Appraised Value: The estimated per share value included in the Issuer Report is based on a valuation of the assets and liabilities of the unlisted REIT. These valuations must be done at least annually and by a third-party valuation expert using an approach that follows standard industry practice.

  • Disclosures: To help address customer misunderstandings new Rule 2340(c)(2)(A) requires account statements that include a net investment to also disclose that part of the distribution includes a return of capital and that the return on capital reduces their estimated per share value. This requirement only apply to account statements that include a net investment where part of the distribution includes a return on capital.


New Rule 2340(c)(2)(B) require firms to disclose the nature of the REIT investment as well as the fact that the REIT is not listed on a national securities exchange, is generally illiquid, and the estimated value on the customer's statement may be higher than the price the customer actually receives for selling the security. These disclosures are required for all account statements that include per share estimated values for the REIT or DPP.

January 1, 2015

SEC's Securities Fraud Whistleblower Program Paying Off

Thumbnail image for whistle.jpgOn September 22, 2014 the Securities and Exchange Commission (SEC) announced a $30 million dollar securities fraud whistleblower award, their largest award since the program started in 2011. The award is more than double the amount of the previous highest award of $14 million. The tipper is the fourth person from a foreign country to receive an award from the Whistleblower program. Because the whistleblower engaged a lawyer to file his or her claim, under the SEC Whistleblower rules, the tipper will remain anonymous and their name will be omitted from all documents or information that could potentially reveal his or her identity. Although the SEC does try to protect the identity of all tippers, those who bypass using a lawyer to file their claim run the risk of having their identity revealed in certain circumstances.

In 2014 the SEC received more than 3,620 tips and paid out more than $1.9 million in whistleblower awards. The amount of awards ranged from $150,000 to $875,000 and included awards to whistleblowers that received their initial award in previous years but were entitled to more because the SEC or criminal authorities were able to collect additional money from the defendants. The amount of tips has increased dramatically since the start of the program and, with this $30 million dollar award, the incentive for whistleblowers continues to grow.

May 1, 2014

March - April 2014 Disciplinary Actions

William Jeffrey Austin (WBB Securitiies, Redlands, California) submitted a Letter of Acceptance, Waiver and Consent in which he was fined $7,500 and suspended from association with any FINRA member in any capacity for 30 business days. The fine must be paid either immediately upon Austin's reassociation with a FINRA member firm following his suspension, or prior to the filing of any application or request for relief from any statutory disqualification, whichever is earlier. Without admitting or denying the findings, Austin consented to the described sanctions and to the entry of findings that he exercised discretion in a customer account without obtaining the customer's written authorization or his firm's acceptance of the account as discretionary.

The findings stated that Austin's firm did not allow discretionary trading in customer accounts and did not accept the customer's accounts as discretionary. Austin provided a response on firm compliance questionnaires in which he falsely attested that he did not exercise discretionary authority over client accounts. The suspension was in effect from February 18, 2014, through March 31, 2014. (FINRA Case #2012031890301 )

Matthew Alan Trulli (Foothill Securities, Visalia, California) submitted a Letter of Acceptance, Waiver and Consent in which he was suspended from association with any FINRA member in any capacity for one year. In light of Trulli's financial status, no monetary sanction has been imposed. Without admitting or denying the findings, Trulli consented to the described sanction and to the entry of findings that he borrowed a total of approximately $197,500 from his member firm's customers. The loans were documented with promissory notes. The loans that have reached their maturity date have not been repaid in full. The findings stated that Trulli's firm prohibited its representatives from participating in borrowing transactions with customers under any circumstances. Trulli provided false information in response to two firm outside business activity reports regarding receiving loans from customers. The suspension is in effect from February 18, 2014, through February 17, 2015. ( FINRA Case #2012032304201)

Michelle Lee Kern (aka Michelle Lee Mertena) (Ameriprise Financial Services, Inc., Roseville/Sacramento, California) submitted a Letter of Acceptance, Waiver and Consent in which she was barred from association with any FINRA member in any capacity. Without admitting or denying the findings, Kern consented to the described sanction and to the entry of findings that she unlawfully converted to her own use approximately $569,000 from customers' brokerage accounts through unauthorized electronic withdraws and used the funds to pay her personal credit card bills. The findings stated that Kern also unlawfully converted approximately $100,000 from customers by using their checkbooks to write unauthorized checks to herself, and then used the funds to pay her personal credit card bills. Some of the customers were elderly. Kern accepted the checkbooks from the customers to destroy, and instead of destroying them, she forged their signatures and wrote personal checks to herself for approximately $100,000, and then deposited the funds into her personal checking account. Kern forged the customer signatures to create the false impression that the customers had authorized the deposit of checks into her personal checking account. ( FINRA Case #2013035458501)

April 24, 2014

Update: Charles Schwab to Allow Customer Class Actions

Today, Charles Schwab agreed to end a long standing dispute over their customer's right to participate in securities class action lawsuits. In a settlement reached with the Financial Industry Regulatory Authority (FINRA), Charles Schwab agreed to pay a $500,000 fine and refrain from including language in its customer agreements that would prevent customers from participating in class actions. Click here for our earlier blog post on this subject.

Brokerage firms have always included language in their customer agreements requiring all disputes to be resolved through FINRA's securities arbitration program--with one exception: Customers were allowed to skip arbitration if a related securities class action lawsuit had been filed. Schwab's recent settlement with FINRA preserves the status quo and maintains a customer's right to either pursue an individual arbitration claim or join a class action.

Arbitration vs. Class Action

The decision whether to join a class action or go it alone in arbitration depends on a variety of factors. In previous blog posts, we've noted that customers with legitimate arbitration claims tend to do much better financially in arbitration. If customers with viable claims can recover more money in arbitration, why would Schwab want to prevent class actions and force all customers to go to arbitration? A major reason is that class actions can be very expensive to defend. In a class action, all affected customers are automatically included in the lawsuit. Even though class members are often paid "pennies on the dollar," total class action payments can be substantial. For example, Schwab agreed to pay more than $200,000 million to settle a class action involving the firm's Yield Plus Fund. By attempting to limit class actions, Schwab was undoubtedly trying to bank on the fact that only a small number of customers will actually go through the legal and financial hassle of pursuing an individual arbitration claim.

Related blog post:


Securities Arbitration vs. Class Actions: Which is More Financially Rewarding?

March 24, 2014

Regulators Fine LPL Financial LLC $950,000 Over Unsuitable Alternative Investments Sales

Thumbnail image for lpl.jpgToday, LPL Financial LLC reached a settlement with the Financial Industry Regulatory Authority (FINRA) over the firm's failure to adequately supervise the sale of non-traded REITs and other risky alternative investments. LPL's settlement with FINRA specifically mentioned former LPL broker Gary J. Chackman for his role in selling "dozens" of alternative investments that were unsuitable and exceeded the firm's guidelines, which he was able to conceal by using false customer financial information. Chackman has been the subject of numerous securities arbitration claims.

Last year, LPL agreed to pay a fine of $500,000 and approximately $2 million in restitution to Massachusetts investors for violating Massachussets suitability rules while selling non-traded REITs, including:


  • Inland American, Cole Property Trust II, Inc.

  • Cole Credit Property Trust III, Inc.

  • Cole Credit Property 1031 Exchange

  • Wells Real Estate Investment Trust II, Inc.

  • W.P. Carey Corporate Property Associates 17

  • Dividend Capital Total Realty


Related blog posts:

LPL Financial, LLC Under Fire for Sale of Non-Traded REITS

Investors Beware: Non-Listed REITs

March 14, 2014

Inland American Real Estate Trust Announces Tender Offer at $6.50 - $6.10 Per Share

Today, Inland American Real Estate Trust, a non-traded REIT, announced a $350 million tender offer at a price range between $6.50 to $6.10 per share. The offer expires April 11, 2014, at 5:00 p.m. (EST). Click here for detailed information about the terms of the tender offer.

At the $6.50/share tentative offering price, Inland investors that paid $10/share will realize a potential loss of $3.50/share--a 35% loss which is unacceptable to many conservative investors who did not appreciate or understand the risks associated with investing in a non-traded REIT. Many affected investors have already taken legal action to recoup their Inland REIT losses via arbitration under the program administered by the Financial Industry Regulatory Authority (FIRNA). Click here for more information about FINRA's arbitration process.

February 25, 2014

Berthel Fisher Fined $775,000 for the Inappropriate Sale of REITs and ETFs

Thumbnail image for violators.jpgYesterday, Berthel Fisher & Co. Financial Services, Inc. entered into a settlement with the Financial Industry Regulatory Authority (FINRA) and agreed to pay a $775,000 fine stemming from sale of unsuitable investments, including non-traded REITs as well as leveraged and inverse ETFs. According to FINRA's BrokerCheck system, Berthel Fisher has been the subject of multiple enforcement actions initiated by FINRA and state securities administrators.

Regulators Stepping Up Supervision of Alternative Investments

Berthel Fisher is the latest of several brokerage firms to get swept up in FINRA's focus on the brokerage industry's sale of risky alternative investments to financial consumers and the failure to properly enforce suitability standards for those investments. The risks associated with investing in non-traded REITs and leveraged/inverse ETFs have been extensively covered in previous blog posts. For more information, see below:

Investors Beware of Non-Listed REITs

Are Leverages and Inverse ETFs Suitable for You?

What Are Leveraged and Inverse ETFs?

February 3, 2014

"Wolf of Wall Street" High Pressure Sales Tactics

Many have complained, myself included, that the movie "Wolf of Wall Street" failed to show the devastation suffered by those who were victimized by Jordan Belfort and his company Stratton Oakmont. Clearly, this movie was produced purely for its entertainment value, not as a documentary or exposé about the evils of the brokerage industry. Nevertheless, the movie may have opened the eyes of some investors to the fact that stockbrokers don't always have their customer's best interest in mind.

As a public service for all of those who didn't see the movie (and those like the elderly couple in the row ahead of me who left the movie early because of all the debauchery being depicted), I am posting actual copies of scripts used by Stratton Oakmont brokers that I've culled from my legal files. My goal is to educate investors about high pressure tactics such as those used by Stratton Oakmont brokers. As illustrated in the scripts below, customers are typically pressured into making a decision immediately over the phone without the benefit of any research or financial data. A common ploy is to get the customer to invest a relatively small amount in a widely known company. Once a relationship is started, the broker will invariably urge the customer to make much larger investments in even riskier securities.

***We disclaim any responsibility for the information contained in the scripts quoted below***


* * *

STRATTON BENEFITS

. . . . We're not a Merrill Lynch or Shearson Lehman, we choose not to be. If we wanted to do a TV commercial, we could. But here at Stratton, our reputation is by word of mouth. We don't require you to purchase 2,000 or 3,000 shares to do business like a major wirehouse would. We don't need to work large, we're willing to work small at the start of a relationship because we know we're right.

My philosophy is to work small, hit a base hit, come back with another idea, hit another base hit, and then another. After I've shown you winner after winner, after winner, and the bases are loaded, you're going to want to step up to the plate and swing for the grand slam.
Give me one shot, let me start the relationship with a base hit. Do this. Open an account for 100 shares, it's just a matter of some basic information.


* * *

NESTLE

. . . . Now [ client's name ], my point to you is this, I can tell you all about Jaguar, Telephone De Mexico and Glaxo, how they traded from the London to the NYSE and dozens of other companies once they got listed, how investors made a fortune. But I'm not going to talk about the market value, the assets of Nestles, the profit margins and the P.E. ratios, because we'll be here all day.

The bottom line is this, what I have been doing for all of my clients A-Z. And hear me out. Is positioning them with large blocks of 5-10,000 shares of Nestles in an attempt to get them involved before Nestles gets its listing on the NYSE because once you read about this in the Wall Street Journal, IT'S TOO LATE! Do you follow me.

Now obviously [ name ], I haven't made you a dime yet, you don't know me from Adam and we don't even have the luxury of a track record together. So, I wouldn't ask you to take down a large block of Nestles like our other clients are doing.

What I propose is this, and please hear me out. Pick up a very small block of 500 shares. It's a cash investment of _____, going into the largest food company in the world. Your funds are not due today or tomorrow, their due in a week. You've probably done this before. First, you'll receive a standard confirmation from my bank clearing agent, Adler Coleman. You probably heard of them.

* * *

KODAK

. . . . The key to making money in the stock market is to buy into weakness and to sell into strength.

Do you remember Union Carbide when their plant exploded in India; killing over 250,000? India sued Union Carbide for over 3 billion in damages. The stock dropped from $50 a share down to $18--sat there for over a year.

Our analyst--------is fat, bald, and dresses like @#$%&!, but he is one of the most astute minds on Wall Street.

He told us to buy Union Carbide between 18 and 21--the litigation will be settled and the fundamentals of the company dictate much higher prices.

6 months ago, I began buying the stock between 18 and 21 in anticipation of a settlement. 3 months ago they settled. The first day the stock was up 5 dollars--the next day up 6 dollars. We had a 60% return virtually overnight. I saw it happen with Texaco. I was a sheep and was scared to buy; when the stock ran to $50 I kicked myself in the @#$%.

The same thing with RJR. I only bought a touch and, when it traded from 25 to 106, I almost died.

But you know something, I got rich on Union Carbide and there is no way I'm letting you miss Kodak. Once litigation is settled were looking for at least 75 dollars a share.

* * *

"SEND ME INFO."

. . . . Receiving and reading it in 3 days is not going to make you money. "Working with my timing will." There is no one that knows this stock better than me. I look for fundamentally sound companies that I can combine with a near term event, in this case litigation.

I'm hearing people all over Wall Street speaking about Kodak in terms that I haven't heard in years. It's the strongest story in months. The decision to buy Kodak has been made, not just by me, but by some of the top analysts at Shearson Lehman, Merrill Lynch, Kidder Peabody and Bear Stearns.

* * *

"ASK MY WIFE"

. . . . I bet you make $10-20,000 dollar business decisions every day. I'm sure you didn't get to where you are today by consulting with your wife on everyday decisions.

* * *

"LET ME CHECK IT OUT"

. . . . This is Eastman Kodak, we have access to the best and most current information. I can show you a view of the market you will not have seen before unless you were here. We're bringing you opportunity, not history and I'm concerned because you must realize you can't check out the kind of advice I'm giving you--performance speaks--I want to show you results.

January 10, 2014

A Handful of Stifel, Nicholas & Company Customers to Recover Losses for Unsuitable Sales of Leveraged and Inverse ETFs

Two related brokerage firms--Stifel, Nicholas & Company, Incorporated and Century Securities Associates, Inc.--entered into a settlement with the Financial Industry Regulatory Authority (FINRA) over alleged misconduct in the sales of leveraged and inverse exchange traded funds (ETFs). As part of the settlement, Stifel and Century agreed to pay fines totaling $550,000 and to make restitution totaling $474,613 to a select group of 65 customers who were sold ETFs between January 1, 2009 and June 1, 2013. Presumably, the group of customers chosen to receive redemption consists of customers who had selected a conservative investment objective and had held the ETFs for an unreasonable period of time. In its written findings, FINRA provided a brief description of two customers that are entitled to redemption:

  • A Stifel customer with a primary investment objective of "income" who invested in a nontraditional ETF and held if for 18 months that lost $41,000.

  • A Century customer with a primary investment objective of "income" who invested in a nontraditional ETF and held if for 2 ½ years that lost $13,600.

More Than Just 65 Customers May Have Been Damaged

It isn't clear whether the group of customers entitled to automatic redemption under the settlement was limited to those who had "income" selected as their primary investment objective. What about other risk averse investors whose stated objective reflected something that was a notch or two above income? Stifel currently offers four investment objectives and six categories of risk tolerance:

Stifel Investment Objectives

  1. Income

  2. Growth & Income

  3. Growth

  4. Speculation/Active Trading/Complex Strategies

Stifel Risk Tolerance Categories
  1. Conservative

  2. Moderately Conservative

  3. Moderate

  4. Moderate Growth

  5. Moderately Aggressive

  6. Aggressive

According to FINRA, during the period in question, Stifel and Century collectively sold over $670 million worth of nontraditional ETFs to their customers. Leveraged and inverse ETFs are exceptionally risky investment products that are unsuitable for most investors who have no desire to engage in an aggressive and speculative trading strategy. Click here for more blog postings about the risks and pitfalls of investing in leveraged and inverse ETFs. My guess is that the number of affected investors goes well beyond the 65 "conservative investors" included in the Stifel and Century's settlement with FINRA. Investors left out of the settlement always have the option of pursuing an individual claim for damages through FINRA's securities arbitration program. For more information about securities arbitration, click here.

December 10, 2013

Closed-End Fund IPOs Often Give Investors the Short End of the Stick

In last week's blog post about closed-end mutual funds [click here for blog post], I warned investors about paying a premium when investing in a closed-end fund's initial public offering (IPO) and suggested that the most prudent thing to do is invest after the IPO. According to the Closed-End Fund Association (CEMA), IPO fees generally range from 4.5%-4.75%.

Although closed-end funds offer liquidity, investors should view a closed-end fund IPO as a long-term investment. Most problems arise when closed-end funds are traded on a short-term basis. Of the six recently issued IPOs listed below, only the Goldman Sachs MLP Income Opportunities Fund is currently in positive territory, trading about 1% above its IPO price. However, since the Goldman fund began trading just two weeks ago, the jury is still out on how well IPO investors are going to fare both near-term and long-term. As mentioned in a previous blog post, investing in a closed-end fund IPO is almost always a losing short-term bet.

ClearBridge American Energy MLP Fund [CBA] (-18.20%)
IPO date 6/26/2013 @ $20/share. Today's opening price $16.36/share.

KKR Income Opportunities Fund [KIO] (-11.75%)
IPO date 7/26/2013 @ $20/share. Today's opening price $17.65/share.

THL Credit Senior Loan Fund [TSLF] (-12.10%)
IPO date 9/20/2013 @ $20/share. Today's opening price $17.58/share.

Center Coast MLP & Infrastructure Fund [CEN] (-15.15%)
IPO date 9/26/2013 @ $20/share. Today's opening price $16.97/share.

Ares Multi-Strategy Credit Fund [ARMF] (-16.84%)
IPO date 10/29/2013 @ $25/share. Today's opening price $20.79/share.

Goldman Sachs MLP Income Opportunities Fund [GMZ] (+1%)
IPO date 11/25/2013 @ $20/share. Today's opening price $20.20/share.

Related Links:

Investing in Closed-End Fund IPOs: A Risky Bet

FINRA Sanctions Merrill Lynch and UBS for Failing to Supervise the Sale of Closed-End Funds

December 4, 2013

Investing in Closed-End Fund IPOs: A Risky Bet

investor alert.gifLooking for higher returns often means looking for trouble. Some financial advisors seeking to offer investors higher yields have been turning to closed-end funds, which can offer distributions as high as 6%. Unsophisticated investors frequently confuse closed-end funds with standard mutual funds, referred to as "open-end funds." Closed-end funds are complex investment products that carry unique risks that may be inappropriate for more conservative investors. Last month, FINRA, the overseer of the financial industry, issued an Investor Alert urging investors to proceed with caution when investing in closed-end funds. (See "Related Links" below.) Unlike mutual funds, closed-end funds are typically offered through an initial public offering (IPO). After the IPO, closed-end funds trade like stocks. However, as FINRA noted in their alert, investors pay a premium when buying shares in a closed-end IPO. We blogged about this issue back in July 2009, based on a study by Lipper Research explaining that market prices for closed-end funds often plunge after the IPO. (See "Related Links" below.)

If you are still convinced that investing in a closed-end fund IPO is a good idea, read this post: Closed-End Fund IPOs Often Give Investors the Short End of the Stick

What is a risk-averse investor to do? Make sure that the fund is suitable based on your financial situation, risk tolerance and investment objectives. Although there is no guarantee that a post-IPO plunge will lead to a subsequent gain, consider investing after the IPO. Finally, if getting in on the closed-end fund IPO is simply to good to pass up, go in with the understanding that this should be a long-term investment that may take time before premiums paid at the IPO can be recouped.

Related Links:

FINRA Investor Alert: Closed-End Fund Distribution: Where is the Money Coming From?

July 2009 Blog Post: FINRA Sanctions Merrill Lynch and UBS for Failing to Supervise the Sale of Closed-End Funds.