The Financial Industry Regulatory Authority took disciplinary action against a broker for violations involving the sales of alternative investments, reports Investment News.
William Burks, who is registered with Centaurus Financial in the Dallas area, was suspended from working in the securities industry for four months. The actions cited spanned the period from February 2017 through April 2020, when Burks recommended that three clients purchase investments that included non-traded real estate investment trusts (REITs), business development companies (BDCs), and interval funds.
According to FINRA’s letter of acceptance, waiver and consent, “Each of the three customers had a low or moderate risk tolerance and two had investment objectives of preserving capital and generating income, which was not reflected on the transaction paperwork submitted to the firm. Burks recommended that each customer invest an unsuitably high percentage of their assets – in amounts that were between 51 % and 91 % of their actual net worth – in the alternative investments, which exceeded firm concentration guidelines and was also not reflected on transaction paperwork submitted to the firm.”
FINRA said the investments were not consistent with the clients’ investment profiles because they were illiquid or had limited liquidity and subjected the customers to a substantial risk of loss.
Burks was found to be in violation of FINRA Rule 2111, which requires a registered representative to have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for the customer to whom it is recommended, based on information obtained through reasonable diligence to ascertain the customer’s investment profile. A recommendation may be unsuitable if it results in a concentration in a particular security or category of securities that creates a risk of loss inconsistent with the customer’s investment profile.
A violation of FINRA Rule 2111 is also a violation of Rule 2010, which requires members to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business.
Along with the suspension, Burks was also fined $10,000. He did not admit or deny FINRA’s findings but accepted them.
InvestmentNews notes that most firms place a limit on advisors’ sales of alternative investments to clients at about 10% of a customer’s net worth, adding that these products are typically lucrative for firms and brokers due to the high commissions involved.
“If an advisor is allocating 15% to 20% of a client’s money to alts, there may be room for discussion,” Sander Ressler, managing director of Essential Edge Compliance Outsourcing Services, was quoted as saying. “But when the allocation gets above 30% or 40% the portfolio, it’s not a question of how bad the firm’s compliance really is, it’s time to question how bad the corporate culture is when thinking about compliance.”
Centaurus Financial and Jeremy Bartell, an attorney for Burks, did not return calls for comment prior to publication.
Each of the clients involved in the matter filed an arbitration complaint concerning Burks’ investment recommendations, FINRA states. Two of the clients have reached settlements of those claims.
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