Firms With Troubled Brokers Are Often Behind Sales of Private Stakes

A review determined that securities firms with an atypically high number of troubled brokers are selling tens of billions of dollars annually of private stakes in companies, often targeting seniors, reports the Wall Street Journal . More than 100 firms where 10 percent to 60 percent of the in-house brokers had three or more investor complaints, regulatory actions, criminal charges, or other red flags on their records were identified. These brokerages helped sell to investors more than $60 billion in private placements. Such sales are climbing as part of a larger elevation in private capital markets, driving concerns among investor representatives about how the products are sold. More than 1,200 firms sold about $710 billion of private placements in 2017 and sales for the first five months of 2018 are on track to surpass that count. "Sales of private placements are so lucrative to the brokerage firms that they are a perennial concern for regulators," notes Brad Bennett, formerly with the Financial Industry Regulatory Authority. Issues regulators are concerned with include whether the placement offers a stake in a legitimate business, what selling perks or markups the brokers get, and how it is sold to investors. Regulators have a heavy reliance on the hundreds of brokerages to track deals, but rich commissions create strong incentives to sell, sometimes without consideration for the investor. "Firms that permit brokers to peddle these products tend to put fee generation above what is good for their clients," says attorney Andrew Stoltmann. "And brokers who want to generate fees at their clients' expense tend to flock to these firms."