Securities Regulators Remove Safeguards & Increase Risk to Investors

Hugh Berkson

On November 17, 2023, the Securities and Exchange Commission approved the Financial Industry Regulatory Authority’s request to loosen supervision standards for remote offices, thereby making it far easier for stockbrokers to sell inappropriate, if not outright fraudulent, investments to their clients.

The vast majority of stockbrokers try to put their client’s interests first, offering advice with each client’s unique needs in mind.

Unfortunately, because brokers are often paid a commission to sell particular products, there’s an incentive for a broker to put their own interests first and foremost. The problem is particularly acute when dealing with non-traded non-public securities, like promissory notes, non-traded real estate investment trusts (“NTRs”), or other private placements not registered with any regulator, all of which tend to pay much higher commissions than would standard investments like listed stocks, bonds, or mutual funds.

While all brokerage firms understand the tension such alternative investments present – high payment to the broker versus what’s best for the client – good brokerage firms maintain a culture that promotes supervision to ensure that rogue brokers aren’t out selling improper investments.

FINRA’s Broker Oversight

It should be obvious that visiting the site where a broker works is a key element in ensuring that the broker is acting appropriately. FINRA’s new rules undercut that concept to a meaningful degree. In the wake of the COVID shutdowns, brokers started working at home and firms struggled with how best to supervise those folks.

FINRA, charged with oversight of the brokerage industry, proposed four different versions of rules that relaxed their member firms’ obligations to conduct in-person site visits for remote offices. Ultimately, the SEC approved the proposed changes to FINRA’s Rule 3110 regarding supervision. We’ll avoid getting into the weeds on the details regarding the new rule changes, but the conclusion is inescapable: the new rules will make it easier for brokers to hide their wrongful conduct from the prying eyes of the firms for which they work.

Investor Diligence

How, then, does this rule change affect YOU? In the simplest terms, you’ll need to be more vigilant when you work with a broker who isn’t working in the brokerage firm’s offices. When your broker works out of their house, or a far-flung single office, and offers you an investment opportunity that sounds too good to be true, it probably IS and you should stay away.

If the pitch is that the investment provides guaranteed income and no meaningful risk, it’s very likely that the truth is that the promised income is guaranteed to fail and there’s tremendous risk you’ll never see your investment again.

Private Placements

Private placements – securities that aren’t traded on a securities exchange like the New York Stock Exchange – pay a much higher commission than you’d see with a stock, bond, or mutual fund that is traded every moment of every day. A broker might be paid 1 or 2% to sell you shares of Apple, but 7% to sell you NeverTradedCo’s private security.

If your broker is offering you such a security, you need to confirm a few things before saying “yes” to the proposal.

Be sure to ask:

  1. Did your firm approve this transaction?
  2. Can I see your due diligence report concerning this offering?
  3. How much are you being paid if I buy this security?
  4. If I need my money back, how do I get it back and how long will that take?

If any of the responses seem “off,” or even vaguely wishy-washy, you’d be well served to decline the invitation to invest. And, if your broker told you to sign forms that are blank (since the broker will fill them in later for you), or if the broker told you to inflate your reported income or net worth so that you’d be eligible to buy what they’re selling, those are huge red flags and you should absolutely decline the invitation to invest.

If, however, you said “yes,” and now find that you weren’t sold a high-quality investment, but rather a bill of goods, please don’t hesitate to call us at (866) 932- 1295 or use the “Contact Us” box to the right of this post and reach out to discuss your experience. We’re happy to speak with you and determine whether we can offer our assistance in recovering your investment.

Related: What Is Breach of Fiduciary Duty? Elements and Examples