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Bates News, Bates Research  |  07-12-18

Private Placements Drawing Attention


A recent analysis undertaken by the Wall Street Journal (“Journal”) found that securities firms selling private placement investments employ an “unusually” high number of high risk brokers. The reporting has raised red flags for regulators who have committed themselves and their agencies to weeding out bad actors and recidivist brokers that, in some cases, allegedly targeted senior investors. The Journal report has led Massachusetts securities regulators to look into a handful of firms that sell private placement investments within the state. Such scrutiny comes at the close of the comment period for FINRA’s “bad actor” rule proposals. Here are the latest developments.

Wall Street Journal Report

Investigative journalists from the Journal, who purportedly reviewed over 1 million regulatory records, “identified over a hundred firms where 10% to 60% of the in-house brokers had three or more investor complaints, regulatory actions, criminal charges or other red flags on their records.” The reporters reviewed some 320,000 private placement filings, also known as “SEC Regulation D” filings, from 2008-2018 and found that these firms collectively sold investors more than $60 billion worth of private placements investments. The growing market for private placements in 2017 was more than $710 billion, according to the report, and “sales for the first five months of this year are on track to top that record-setting tally,” according to the Journal.

Only about “4 out of 10 brokerages sell private placements,” however, the analysis found that “these brokerages account for more than half of the 94 firms that FINRA expelled since 2013.” Furthermore, the Journal reported that most of the firms that employ these troubled brokers were small- to mid-size. The bigger firms, they noted, “have proportionally fewer brokers dealing direct with investors.”

Legal and industry insiders are quick to point out, however, that “the fact that a broker-dealer employs agents with a disciplinary history does not necessarily mean that private placements are being sold through improper sales practices or to accounts for which such investments may not be suitable.” (Other criticism of the Journal analysis can be found here.)

In a follow up Journal article, NASAA expressed a commitment to “work even closer with federal law enforcement to target bad actors.” FINRA reaffirmed existing commitments to making private placements an examination priority and an area of focus in the oversight of the brokerage industry, and SEC Chair Jay Clayton stated at a recent public forum in Atlanta that the SEC is “looking at our private placement rules; they can use a sprucing up.”

Massachusetts Inquiry

Responding to the Journal analysis, on July 2, 2018, Secretary of the Commonwealth William F. Galvin announced that the State of Massachusetts will further look into the sales of private placement investments. Secretary Galvin asserted:

“Private placements are risky investments that reward the salesperson handsomely with high commissions. Firms offering these to the public, especially seniors, have an obligation to see that they are sold to benefit the investor, not the broker. Individuals with a history of disciplinary actions magnify the risk of unsuitable sales in connection with private placements.”

FINRA High Risk Broker Proposals: Comments Are In

The comment period for FINRA’s proposed rules on high risk brokers expired on June 29. The self-regulatory organization will now determine whether to issue final rules or amend the proposals based on the comments, which were varied. As previously reviewed by Bates Group, the proposals would: 1) reinforce certain firm supervisory obligations concerning associated persons with a history of past misconduct, 2) impose new restrictions on member firms that hire or employ high-risk brokers and 3) revise quantitative suitability standards.


The Journal analysis was an inconvenient reminder that issues inherent in the hiring of high risk brokers will never be fully eliminated. Now that more attention is being paid to private placements by at least one state regulator, and it is on federal regulators’ radars, it may be time to expect an increase in regulatory activity. Bates will keep you apprised.

Contact Bates Group

Bates Group is with you every step of the way. Contact us today for more information on how our End-to-End Solutions can help your firm.