Transamerica Financial Advisors Sanctioned Over Overcharging Commissions On Non-Traded REITs and Business Development Companies
The Financial Industry Regulatory Authority (FINRA) fined (Case No. 2014042291801) brokerage firm Transamerica Financial Advisors, Inc. (Transamerica) concerning allegations between January 25, 2012 to February 5, 2014, Transamerica failed to apply volume discounts to eligible purchases of non-traded real estate investment trusts (Non-Traded REITs) and business development companies (BDCs). In addition, FINRA found that Transamerica failed to have in place an effective supervisory system and written supervisory procedures reasonably designed to ensure that its customers received appropriate volume discounts on eligible purchases of non-traded REITs and BDCs
Transamerica has been a FINRA member since 1985. Transamerica conducts a general securities business and has over 5,000 brokers and over 1,100 branch offices nationwide.
As a background, a Non-Traded REIT is a security that invests in different types of real estate assets such as commercial, residential, or other specialty niche real estate markets such as strip malls, hotels, storage, and other industries. There are also publicly traded REITs that are bought and sold on an exchange with similar liquidity to traditional assets like stocks and bonds. However, Non-traded REITs are sold only through broker-dealers, are illiquid, have no or limited secondary market and redemption options, and can only be liquidated on terms dictated by the issuer, which may be changed at any time and without prior warning. A BDC is an investment company that invests in certain private or thinly traded public companies and shares many structural similarities to Non-Traded REITs.
Non-traded REITs and BDCs may offer volume discounts to investors where the price per share received by the investor is discounted when the investor reaches an accumulated level. The volume discount offering terms are set in the offering's prospectus. In order to fund the discount the broker’s selling commission paid by the investment product's wholesaler to the broker-dealer is reduced.
FINRA found that Transamerica failed to identify and apply volume discounts to certain customers' eligible purchases of Non-Traded REITs and BDCs, resulting in customers paying excessive sales charges of approximately $51,000. Also, FINRA determined that Transamerica failed to establish a supervisory system and procedures with respect to the sale of Non-Traded REITs and BDCs reasonably designed to identify accounts that would be eligible for volume discounts. Instead, FINRA found that Transamerica relied on its brokers to ensure its customers received the volume discounts but also failed to provide adequate guidelines, instructions, or policies for its brokers and supervisors to follow to determine whether a purchase qualified for a volume discount.
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