Recently in Merrill Lynch Category

February 15, 2013

Merrill Lynch Enters the Non-Listed REIT Market

As noted in a recent blog post, we have seen an influx of cases involving non-traded Real Estate Investment Trusts ("REITs"). We have also been trying to spread the word about the hazards of these little understood investment vehicles through our blog postings. [See Investors Beware: Non-Listed REITs] With all the negative attention given to non-traded REITS, it came as a surprise to learn that Bank of America's Merrill Lynch subsidiary had recently begun offering the Jones Lang LaSalle Income Property Trust, Inc. to it's "mass-affluent" customers (i.e., investors with a net worth between $100,000 to $1 million, excluding their home).

Suitability: Moderate Risk Investors Need Not Apply

For a detailed discussion of suitability criteria and risk factors, be sure to read the prospectus. Below is a summary of the minimum suitability criteria established by this REIT:

  • The minimum amount that can be invested in this REIT is $10,000.

  • The REIT can only be sold to investors who have either: (1) a minimum net worth of $250,000; or (2) a minimum gross annual income of at least $70,000 and a minimum net worth of at least $100,000.

  • Investors may not invest more than 10% of their liquid net worth in this REIT, either alone or in combination with other similar illiquid investments.

Investors should not be lulled into a false sense of security about the safety of this REIT. Notwithstanding the REIT's stated investment objective to "preserve and protect our stockholder's capital investments," when push comes to shove, Merrill Lynch's attorneys will argue that the REIT's prospectus clearly stated that the investment "involves a high degree of risk" and that investors should only purchase this security if they can afford the "complete loss" of their investment. Thus, this investment is only suitable for investors who have a high risk tolerance.

Illiquidity: Consider a Publicly Traded REIT

As previously stated, there is no public market for this REIT. All sales are subject to the REIT's share repurchase plan which require investors to hold their shares for at least a year before they are available for repurchase. Furthermore, the REIT may suspend repurchases if there is a run on the bank and honoring repurchase requests would adversely affect operations of the REIT. This is exactly what happened to a number of REITs and other privately offered real estate investments that were adversely affect by the recession in 2008.

As we stated in a previous blog post: If you are convinced that a REIT is an appropriate investment, do what sophisticated institutional investors do and invest in a publicly traded REIT instead.

October 5, 2009

FINRA Dispute Resolution Expands Pilot Program for Securities Arbitration Panels

Here is a bit of good news for investors with securities arbitration claims against 14 of the largest brokerage firms, including Merrill Lynch, Morgan Stanley Smith Barney and Wells Fargo. The Financial Industry Regulatory Authority (FINRA) has agreed to extend its year-old pilot program established to give investors the option to request an arbitration panel composed entirely of arbitrators that are not affiliated with the securities industry. Currently, a 3-person arbitration panel must include one industry arbitrator and two public arbitrators. The pilot program was created in response to criticism over whether an industry arbitrator, such as a stockbroker or branch manager, can act impartially when a customer is complaining about securities fraud or account mismanagement by their broker. I've participated in arbitrations with both good and bad industry arbitrators. The trouble is, allowing an industry arbitrator to sit on a panel gives the appearance of bias and takes away from the legitimacy of the proceedings. That should be reason enough to dump the industry arbitrator. My California securities law firm is in favor of the pilot program and we have been actively encouraging clients to participate whenever possible.

The brokerage firms who have agreed to participate in the pilot program are:

Ameriprise Financial Services
Charles Schwab
Chase Investment Services
Citigroup Global Markets
Edward Jones
Fidelity Brokerage Services
LPL Financial
Merrill Lynch
Morgan Stanley Smith Barney
Oppenheimer
Raymond James
TD Ameritrade
UBS Financial Services
Wells Fargo Advisors / Wachovia Securities

Each of the above firms has committed to participate in a limited number of cases under the program on a first come, first served basis. The pilot program will end on October 5, 2010. Since the average arbitration hearing takes 14 ½ months to conclude, most cases in the pilot program have not gone to hearing yet. FINRA plans to compare the results of the pilot program cases with non-pilot cases. Of the 396 arbitration cases that have been decided this year, only 139 (45%) recovered anything at all. Hopefully, the arbitration award results for cases in the pilot program will be much better. If the pilot program results in more awards in favor of customers, will the brokerage industry lobby to keep the industry arbitrator? Let's hope not.

July 29, 2009

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

Before discussing the Financial Industry Regulatory Authority's (FINRA's) latest action against Merrill Lynch and UBS, I want to share a related story about a client at my San Mateo, California, securities law practice who had invested a substantial part of her portfolio in a Closed-End Fund (CEF) that, unknown to her, was purchased as part of an Initial Public Offering (IPO). The client, who had recently been widowed, had made a large deposit in her brokerage account following the sale of her deceased husband's business. Needless to say, the widow wanted to proceed cautiously and preserve her capital. Unfortunately for the widow, the broker did not share with her the "dirty little secret" about investing in CEFs:

Customers who invest in Closed-End Funds at the IPO almost always suffer an immediate loss.

This came as a shock to the widow, but it is a well known fact within the industry and is supported by a large body of research going back over 20 years. The reason is simple. CEFs almost always trade at a discount to their Net Asset Value (NAV) in the secondary market. However, when an IPO is structured, the fund's offering price is typically set at or above the NAV. Thus, the fund's price usually plunges after the IPO when the shares begin trading in the secondary market. See e.g., Lipper Research Report, "Buying a Closed-End Fund Initial Public Offering: Caveat Emptor!" (November 8, 2004)

The moral of the story is, never be in a hurry to invest in a newly launched CEF. By waiting several months after the IPO, an investor can purchase the fund at a discount and avoid paying an underwriting charge. The only way to conceivably benefit from buying a CEF at the IPO is to hold onto it for a period of time that is long enough to recoup the higher price paid at the IPO.

Back to FINRA's Recent Action Against Merrill Lynch and UBS

As part of the settlement with FINRA, Merrill Lynch and UBS consented to FINRA's findings that the brokers had earned high fees through short-term trading of CEFs by recommending that their clients invest in CEFs at the IPO and sell them a few months later, usually at a loss, so that the proceeds could be invested in yet another CEF-IPO. FINRA determined that both Merrill Lynch and UBS failed to adequately supervise, monitor and detect the broker's improper activities. Without admitting any fault, Merrill Lynch and UBS agreed to pay fines of $150,000 and $100,000, respectively. They also agreed to repay a total of $5 million to victims that were identified during the investigation.