Broker-Dealers are pushing back against FINRA’s attempt to cap commissions on private offerings, also known as Reg D offerings. Most of these offerings are very high risk, involve high commission payments and high fees. Thus serious concerns have developed about whether such investments are sold to investors because they are viable investments or because they generate the most commissions. In an effort to reduce the potential conflicts of interest, FINRA has proposed requiring firms to limit these charges.
The brokerage firms are not happy about these proposals. “Who died and appointed you the arbiter of how much it costs as a percentage of that capital to offer such programs?” was the indignant comment by one member of the securities industry that wants no part of a proposal by its self-regulatory organization to cap at 15% commissions and other fees for outside private placements, according to Bruce Kelly’s InvestmentNews article, “Securities firms fight commission cap plan for private placements.”
The proposal would also mandate that at least 85% of the proceeds from outside private placements be used for the business purposes of the investment. Some objectors argue that this would cause firms to eliminate due diligence from their budgets! Others argue that it would prevent small business from raising capital through private placements.
Of the 32 comment letters submitted, 19 opposed the proposal, 11 wanted revisions and only two approved of the proposal in its original form.
Currently, FINRA only caps commissions and expenses on private placements issued by its own broker-dealer members. That cap is 15%, the same as the proposal, according to the article.
The FINRA proposal would also require additional disclosures regarding the intended use of the offering proceeds, expenses and compensation to broker-dealers.
The Provident Royalties fraud is one of the reasons for the proposal, according to FINRA.
Provident’s broker-dealer reportedly told investors that “86% of the offering proceeds would be used for oil and gas investments, when in fact, more than 50% of the proceeds were used to pay the dividends and expenses of earlier offerings.
In some private placements, particularly oil and gas deals, commissions and costs can eat up 20 cents of each dollar invested, according to the article.
Sales of private placements, also known as Regulation D offerings, and non-traded real estate investment trusts have become a major concern, according to FINRA.
Investors’ attorney J. Boyd Page of Atlanta applauded FINRA’s proposal but doesn’t think it goes far enough. “Most private offerings are sold to investors, they are not bought by investors. They generally involve high risks and have been catastrophic for investors in many cases. Certainly one of the most attractive aspects of these investments to brokerage firms is the huge fees they generate. On the other hand, those huge fees mean that less investors’ money actually goes into the underlying venture. Would you buy a mutual fund if 20% of every dollar you invested went to pay commissions and only the remaining 80% of your dollar went to the fund’s net asset value?”
Page Perry has over 125 years collective experience representing institutional and individual investors in private offering litigation and arbitration all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions.