Private (Reg D) Offerings, Reverse Convertibles and Leveraged ETFs are on FINRA’s Hit List


The Financial Industry Regulatory Authority (FINRA) is examining sales of opaque and illiquid private investments with a critical eye, according to Bruce Kelly’s InvestmentNews article, “Private deals at top of FINRA’s hit list.”

Indeed, according to James Shorris, executive vice president and executive director of enforcement, Regulation D private placements and non-traded real estate investment trusts (REITs) are identified as FINRA enforcement’s first and second areas of focus.

This is a “major, major initiative” at FINRA, Mr. Shorris was quoted as saying, adding that some firms failed to perform appropriate due diligence on certain private offerings.

Mr. Shorris specifically named notes issued by Medical Capital Holdings Inc. and Provident Royalties LLC, which raised hundreds of millions of dollars through sales by independent broker-dealers. In 2009, the SEC charged both companies with fraud.

With regard to the sale of non-traded REITs: “Those may not have been sold properly by reps to customers,” Shorris was quoted as saying, meaning that brokers sometimes fail to tell clients about the lack of liquidity and other risks associated with the investment.

FINRA is also examining other non-traditional investment products, such as reverse convertibles and leveraged exchange-traded funds -investment products that Mr. Shorris characterized as “chasing yield” in a historically low-interest-rate environment.

Earlier this year, Susan Axelrod, head of FINRA’s sales practice regulation division, reportedly announced that FINRA will focus on four (4) key areas when examining firms in 2011: (1) suitability, particularly with regard to exchange traded funds, annuities and reverse convertibles; (2) private placements with a particular emphasis on fraud; (3) protecting confidential client information; and (4) compliance with anti-money laundering policies and procedures.

FINRA also announced that its Office of the Whistleblower has been successful in speeding up reviews of tips and has made approximately 58 referrals to the Securities and Exchange Commission and other FINRA departments.

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing institutional and individual investors in investment-related 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.