Articles Posted in Alternative Investments

The Massachusetts securities division is widening its probe into alleged proxy voting fraud at Realty Capital Securities to include independent broker-dealers and advisers that sold RCS alternative investments, including nontraded real estate investment trusts. According to Massachusetts Secretary of the Commonwealth William Galvin’s complaint against RCS, firm employees communicated with other brokerage firm agents and talked about how to procure proxy votes. Massachusetts securities division spokesperson Brian McNiff said that these employees would send these agents a broker-dealer authority letter without verifying if they “had authority to vote client shares.”

Galvin, in his complaint, accused RCS of fraudulently gathering proxy votes to support real estate deals backed by AR Capital. He said RCS agents pretended to be shareholders and cast bogus votes for AR Capital-sponsored brokers. AR Capital is owned by Nicholas Schorsch and William Kahane. Schorsch is a principal shareholder in RCAS Capital, also known as RCAP, which is RCS’s parent company.

The state regulator has been probing Schorsch-related companies for the past year. In 2014, Galvin began a probe into RCS after American Realty Capital Property, which Schorsch controlled at the time, disclosed that it had purposely not corrected a $23 million accounting mistake.

This week, and in the wake of the charges filed by Massachusetts against RCS Capital, Fidelity Clearing & Custody and Charles Schwab and Corp. (SCHW) made the decision to step selling AR Capital products. Alternative investment products by AR Capital are marketed to advisers via Realty Capital Securities. Also, Cetera Financial Group said it would stop the sales of AR Capital-branded alternative investments, including REITs. The retail brokerage network announced the cessation a day after Galvin charged RCS with fraud.

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ITG Inc. and affiliate AlterNet Securities will pay $20.3M to resolve Securities and Exchange Commission charges accusing them of running a secret trading desk and misusing dark pool subscribers’ confidential trading information. As part of the settlement, ITG admitted to wrongdoing.

According to the regulator, even though it told the public it was an “agency-only” broker with interests that were not in conflict with the interests of customers, the firm ran Project Omega, an undisclosed proprietary trading desk, for over a year. The SEC’s probe found that even though ITG said that it protected dark pool subscribers’ trading information, for eight months, the trading desk accessed feeds of order and execution data and used the information to put into place its strategies for high-frequency algorithmic.

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Kara Stein, an SEC commissioner, is calling on the Securities and Exchange Commission to examine whether exchange-traded funds and alternative funds are managing to get around certain rules and placing investors at risk. Stein said that both types of funds, which use high-risk complex investment strategies or place their money in illiquid assets, frequently “operate in a gray area” when it comes to regulation.

During a speech at the Brookings Institution, the SEC Commissioner noted that alternative mutual funds, which act like hedge funds and are often called liquid alts, don’t have to abide by the Investment Company Act of 1940 rules regarding leverage and liquidity. Stein said that the promise of benefits like those that come with investing in hedge funds along with liquidity of more traditional mutual funds are part of why alternative mutual funds appeal to investors. However, alternative mutual funds don’t necessarily provide the protections that accompany their more traditional counterparts.

Now, Stein is suggesting that the SEC propose rules regarding liquidity and the use of derivatives in alternative mutual funds. She said that the industry and regulators should ensure that retail investors continue to receive protections.

Earlier this month, the SEC announced that it is open for feedback from the public to help determine how to best review the listing and trading of unusual, new, or complex exchange-traded products. Because investment strategies of ETPs have expanded in recent years, there has been a growth in the amount of new ETPs and kinds of complexities. Meantime, individual and institutional investors continue to seek out these types of products.

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The U.S. Securities and Exchange Commission is developing regulations that would make sure that mutual funds are liquid enough to satisfy client redemptions and money managers have a plan should a fund fail. Part of the regulator’s strategy may include limiting how mutual funds are allowed to place in assets that are hard-to-sell and use derivatives to enhance returns.

InvestmentNews reports that according to a report issued by the International Monetary Fund last month, mutual funds’ holdings of leveraged loans, junk bonds, and other assets that don’t trade often had higher market and liquidity risks. The IMF said that this could “compromise” financial stability unless the matter is dealt with. Mutual funds also have come under the Financial Stability Oversight Council’s scrutiny.

Per the SEC’s agenda, regulators could propose new mutual fund rules in October of next year. Earlier this year, when Commission Chair Mary Jo White talked about an action plan that the agency was developing to enhance asset management oversight, she noted that the regulator intends to mandate that mutual fund investments provide more disclosures. The SEC has been seeking to gain greater insight into whether the asset management industry presents a risk to the financial system.

According to a survey issued by Morningstar Inc., financial advisers may be using the wrong benchmark when evaluating and choosing alternative investments. The research firm and Barron’s magazine questioned 301 advisers and 372 institutional investors.

Right now, the most popular way that advisers assess their investments’ performance is with a standard benchmark index and not by measuring performance against customized benchmarks, competitor funds, or risk-adjusted analysis. While about 25% are using the Russell 2000, the S & P 500, or similar benchmarks, the rest of those who were surveyed work with different methods.

Now, however, there are industry executives and analysts who are saying the index benchmarks are not up to the job of assessing the funds’ performance. Alternative investments typically employ different strategies and may have distinct goals.