Investors recover losses against LPL Financial as FINRA warnings against complex products continue


By Bradd Milove

Last month, federal regulators at the Financial Industry National Regulatory Authority (FINRA) issued a public notice advising the securities industry, investors and brokers alike against what have come to be known as “

complex products

” – alternative investments ranging from

real estate TICs

and non-traded REITS to hedge funds, mortgage-backed securities and derivative-based investment products. Both SEC and FINRA officials find these products unsuitable for sale to most investors; and in fact,

Regulatory Notice 12-03

is only the latest in a string of FINRA publications reinforcing this view.

Because most “alternative investments” (i.e. non-traditional stocks or bonds) are convoluted products that do not trade on a public exchange, they lack transparency and can be difficult for both brokers and investors to understand. Repeated investor abuse arising from undisclosed and unknown risks involved in these non-traditional investments has led FINRA to tighten brokerage firms’ regulations and compliance with their sales and marketing requirements, and to discourage buyers and sellers alike from participating in this perilous field. Notwithstanding, the securities industry has foisted tens of billions of dollars worth of questionable real estate and purported asset-backed investments on an unknowing and reliant public. However, investors are just beginning to gain a legal foothold in their efforts to recover lost investment funds, as evidenced by the results of a recent case in which a FINRA arbitration panel awarded over $1.36 million to an elderly San Diego couple deceived into a TIC deal sold by LPL Financial.

The most recent FINRA Regulatory Notice concerning these kinds of investments begins by addressing the issue of brokerage firms and their handling of any and all securities recommended to investors. Because sales of alternative products are frequently made pursuant to thick and convoluted “Private Placement Memorandum” or “Prospectus” documents, FINRA requires that firms perform due diligence before pitching any investment product by verifying the adequacy and accuracy of representations made to investors in the sales literature. In addition, FINRA requires that brokers achieve a detailed understanding of the product in question, including all risks, both likely and unlikely, depending on various market conditions. This provision is particularly important, as FINRA has identified complex products as bearing risks “beyond the fundamentals of market forces;” and subsequently, the Notice adds that firms should maintain a written verification process to ensure that brokers adhere to these measures before marketing any complex products to investors. As a practical matter, however, most brokers and financial advisors are ill equipped to read and comprehend the nuances and risks attendant to these investments, and are therefore wholly reliant on the brokerage firm to vet the virtues and risks. Unfortunately, the huge commissions available to brokers frequently trump their duties to comprehend the investments – and the impact on investors can be devastating.

Protect yourself with the latest FINRA news -- and exercise caution when presented with TICs, non-traded REITs and other “alternative investments”

Ultimately, FINRA requires “good faith and fair dealing” with the investing public and challenges firms to satisfy basic questions before recommending or selling complex products to investors. Among these questions, perhaps the most direct is this: can a simpler investment product or strategy achieve the same result? Regulatory experts have concluded that the answer is almost always “yes” – and that the motivation for promoting complex products is primarily due to the exorbitant commissions and fees garnered by sellers in the process.

At the law firm of Miller & Milove, our team of experienced

investment and securities attorneys

keeps track of the latest market and legal developments, as well as SEC and FINRA recommendations, in an effort to protect the investing public and promote truth and honesty within our national capital markets. Miller & Milove recently represented investors against LPL Financial in a FINRA arbitration proceeding, resulting in a recovery of $1.36 million arising from the Heron Cove and Braintree Park offerings issued by Direct Invest, a real estate TIC promoter. To learn more and remain up-to-date on the most recent FINRA notices and related information, visit

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