The Profile of the Securities Industry is Changing


The ratio of broker-dealer closings to openings is almost 2:1, and this is a trend, especially for smaller broker-dealers, according to Bruce Kelly’s InvestmentNews article entitled “Ranks of B-Ds likely to shrink by 540 firms in three years.” 336 B-Ds withdrew their registration last year, compared to 190 new openings. Currently, there are 4,540 FINRA-registered broker-dealers, but that number could drop to 4,000 over the next few years, according to a research firm named The Compliance Department Inc., which predicts that the industry could see an 11% net loss of brokerage firms by 2014.

“That’s an alarming prediction and one that may surprise even hardened veterans of the brokerage business,” writes Mr. Kelly. Notable failures over the past year and a half include GunnAllen Financial Inc., Jesup & Lamont Securities and QA3 Financial Corp., all of which became embroiled in legal troubles over the sale of private placements that the Securities and Exchange Commission subsequently charged with fraud.

“It’s a steady trend,” Mr. Alsup said. “It’s not a free fall. It will take another three years to get to 4,000 broker-dealers,” he said. “At the rate it’s going, at least three years. I don’t think it would go much lower than that.”

Mom-and-pop broker-dealers, small shops with one or two registered reps, are dying off, David Alsup, national director of The Compliance Department Inc., was quoted as saying, adding “It’s close to a washout” for those smaller broker-dealers that specialized in private placement.

Ironically, most of the growth in the industry is coming from firms that create and sell private placements and foreign-owned broker-dealers.

Private offerings are also known as Reg D offerings, a reference to the exemption from registration that is commonly used. Many of these offerings are very high-risk, and involve high commission payments and high fees. Serious concerns have developed about whether such investments are sold to investors because they generate high commissions, regardless of their unsuitability for the investors. FINRA has proposed to cap commissions at a hefty 15% and require that 85% of investors’ money be placed in the investment.

Perhaps because of these incentives, broker-dealers often fail to perform adequate due diligence on the investments they sell. This is extremely risky for the broker-dealers as well as their clients.

Investor attorney J. Boyd Page, the senior partner at Page Perry, based in Atlanta, observed: “This just shows how risky these small firms that sell private placements are. Not only have they destroyed investors’ life savings, they are destroying themselves because proper due diligence is absent.”

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. Page Perry’s attorneys have extensive experience in representing investors in cases involving private placement or Reg D securities. For further information, please contact us.