Berthel Fisher and Affiliate, Securities Management & Research, Fined $775,000

Real estate investment trusts (REITs) are companies that own and, usually operate, income-producing real estate. This real estate can be quite diverse – from hospitals to timberlands – and are structured with the intent of providing for investment stocks. These REITs can be either privately held or publicly traded and can be classified as equity, mortgage, or a hybrid of the two. The appeal of REITS to investors is that they offer special tax considerations, high yields, and a fluid method of real estate investing. REITs, however, can be complex and therefore require strong supervisory practices to ensure they are managed with complete compliance.

Recently, Berthel Fisher & Company Financial Services, Inc., an Iowa-based financial services firm, was found to be flagging in its supervisory procedures pertaining to REITs and ETFs (exchange-traded funds). Consequently, Berthel Fisher was fined by the Financial Industry Regulatory Authority (FINRA) for failure to supervise in an adequate manner the sale of non-traded real estate investment trusts, as well as leveraged and inverse exchange-traded funds. Included in FINRA findings is Berthel Fisher affiliate, Securities Management & Research, also an Iowa-based company. FINRA has assessed a $775,000 fine against the entities. Additionally, FINRA has mandated that Berthel Fisher is required to hire an independent consultant to assure that there are no further such supervisory oversights pertaining to the sale of alternative investments.

“A strong culture of compliance is an essential element of the proper marketing of complex products. Berthel’s supervision of the sales of non-traded REITs, inverse ETFs and other products fell short of this standard, as it failed to ensure that its registered representatives understood the unique features and risks of these products before presenting them to retail clients,” stated Brad Bennett, Executive VP of Enforcement for FINRA.

In its investigation, FINRA determined that over the course of nearly five years, Berthel Fisher’s supervisory and written procedures governing the sales of alternative investments were insufficient. There were several areas of concern for FINRA, and one such concern was that the firm did not properly impose standards that determined the suitability of many of these investments. They also failed in the area of suitability review for certain investments by not educating their staff on individual state suitability standards. These compliance failures are documented in the FINRA findings report as follows:

The primary tool the firm used to monitor concentration levels was an alternatives investment log, which was inadequate for two reasons. First, the log only recorded approved alternative investment transactions that were effected and approved at the firm. Accordingly, alternative investment transactions that were transferred to the firm from a broker-dealer account outside of the firm or brought in with a new customer of the firm were not recorded on the log. The firm, therefore, could not ensure that in certain instances the alternative investments listed on the log represented a complete picture of the amount of alternative investments in a customer’s portfolio. Second, the firm did not implement controls sufficient to ensure that its principals recorded all of the approved alternative investment transactions, thus compromising the suitability review for later transactions.

In addition to those findings, FINRA also discovered that from April 2009 to April 2012, Berthel Fisher did not have justifiable grounds for some leveraged and inverse ETF sales. The company fell short in suitably researching or reviewing non-traditional ETFs before permitting its agents to recommend them to clients. They also did not provide training to its sales force regarding these investments nor monitor the holding periods by clients which caused some customers to lose money.

In keeping with FINRA’s reporting requirements, Berthel Fisher has disclosed more than 20 regulatory actions which have resulted in nearly $1.2 million in fines and penalties, and they have been censured numerous times. Yet, as is often the case with companies against which such charges are leveled, Berthel Fisher and Securities Management & Research neither admitted nor denied the most recent charges against them, but they did consent to the entry of FINRA’s findings.

It would seem that for many of these financial institutions that are entrusted with the financial future of others, fines and penalties are just one more cost of doing business. If these actions on the part of Berthel Fisher or Securities Management & Research have resulted in financial losses for you, please contact the Blum Law Group for a free consultation at 877-STOCK-LAW.

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