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BD private placement sales under scrutiny amid push to expand offerings

Several major broker-dealers face an investigation by prominent Massachusetts regulator William Galvin’s office in connection with nearly $1.3 billion in sales of private placements over the past five years.

Galvin has requested information about GPB Capital Holdings' alternative products from more than 60 firms, including HighTower Securities, Advisor Group’s four IBDs and Ladenburg Thalmann’s Triad Advisors, according to SEC Form D filings and Galvin’s office. Galvin announced the investigation on Sept. 12, noting it's in the "very nascent stages."

Private Placement sales

GPB, the sponsor of limited partnership offerings GPB Automotive Portfolio and GPB Holdings II, said last month that it was not accepting new capital. Sales of the two alternative products netted the BDs $100.1 million in commissions, a rate of about 8%, since 2013, the SEC filings show.

Large IBDs generated only $75.7 million in revenue from all types of alternative products in 2017, according to the 21 firms voluntarily disclosing such revenue as part of Financial Planning’s FP50 survey. Private placements can yield high returns, but they also carry high risk of losses, along with litigation.

SEC Chairman Jay Clayton said last month that the agency would seek public comment on the idea of giving retail clients more access to private stocks. GPB’s offerings, for example, require investments of $50,000 or $100,000, respectively, attracting more than 12,000 high-net-worth investors.

The so-called sweep of the IBDs by Galvin’s office stemmed from a tip about sales practices at one firm and other “red flags,” including GPB’s halt on investments and redemptions, missed SEC filing deadlines and a lawsuit involving the botched sale of an auto dealership for $40 million, Galvin said in a statement.

“These red flags, coupled with the fact that sales of private placements by independent broker-dealers have been an ongoing source of investor harm have led to this investigation,” he said.

“I must also express my serious concerns regarding the expected proposal by the SEC to expand who can participate in private securities offerings,” Galvin added. “Without a strong fiduciary rule to prevent sales practice abuses, it is utter folly not to know that Main Street investors will be hurt.”

The expense ratios for these funds were closer to that of the average actively managed equity mutual fund.
September 12

GPB spokeswoman Dana Taormina confirmed that some BDs have received the requests for information from Galvin’s office but said the New York-based firm was not in a position to comment on the matter.

“As we have previously disclosed to investors, GPB Capital is in the process of completing the audits of the financial statements for certain of its funds and is currently not accepting new capital from investors until that process is complete,” Taormina said in a statement.

A spokesman for Advisor Group declined to comment, and representatives for Ladenburg and HighTower didn’t respond to requests for comment.

An SEC spokesman declined to respond to Galvin beyond Clayton’s comments late last month. Clayton vowed to open up high-quality offerings to ordinary people without removing investor protections. He said his views on the topic changed since he became chairman of the SEC last year, The Wall Street Journal reported.

“It came from doing the job and recognizing that for retail investors the opportunity set beyond the public market is pretty low and pretty costly. And pretty risky,” Clayton said. “But people want that.”

Galvin’s office has asked the BDs how much of the private placements they sold to clients from Massachusetts, what disclosure and marketing documents they used and how they evaluated the suitability of the products. A spokeswoman said no additional information about the investigation was available.

The alternative asset management firm GPB came out of the corporate advisory and accounting company Gentile, Pismeny & Brengel, and it has raised more than $1.5 billion in capital while acquiring more than 160 portfolio companies, according to its website.

Auto dealerships make up the largest portion of GPB’s portfolio. Its other areas of focus include waste management, technology-enabled services, health care, debt strategies and special situations.

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