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FINRA Announces Enhanced BrokerCheck System

Yesterday the Financial Industry Regulatory Authority announced an enhanced version of their BrokerCheck system. We regularly suggest that investors consult FINRA's BrokerCheck since these records contain important information about complaints and specific actions about individual brokers and firms. According the FINRA Executive Vice President Derek Linden, investors "using BrokerCheck will encounter a more user-friendly interface that allows them to quickly find information that can help...

Study Finds that the Average PE Investor Just Breaks Even

Brendan Conway over at Barron's pointed out an interesting new study from the National Bureau of Economic Research entitled: Valuing Private Equity. Private Equity (PE) investments -- typically called limited partnerships (LPs) -- are long-term, illiquid securities representing (perhaps not surprisingly) an equity interest in a private company. Investors are typically referred to as limited partners. The study notes that while private equity returns tend to be high, "it remains controversial...

Structured Product Fees and Credit Risk

Kevin Dugan noted in the April edition of Bloomberg's Structured Notes Brief that "Citigroup collected the highest average fees in the first quarter [of 2013] among the 10 biggest underwriters of U.S. structured notes." This got us wondering, is there any relationship between the credit quality of the underwriter and the fees the underwriter collects? If investors truly understood credit risk, issuers with higher credit risk would presumably have to structure products with lower fees to...

SEC Litigation Releases: Week in Review - November 8th, 2013

SEC Charges Royal Bank of Scotland Subsidiary with Misleading Investors in Subprime RMBS Offering
November 7, 2013, (Litigation Release No. 22866)
According to the complaint, RBS Securities Inc. (a subsidiary of the Royal Bank of Scotland plc) misled investors "in a 2007 subprime residential mortgage-backed security (RMBS) offering" by stating that the "loans backing the offering 'generally' met the lender's underwriting guidelines." According to the SEC, nearly 30 percent of the loans "fell...

'Tailored' Exchange Traded Funds

Issuers of new exchange traded funds (ETFs) have a problem: how to attract enough investment to keep the fund alive. ETFs have a relatively high turnover rate, and many of the funds that fail simply never gained significant assets under management. Also, if the fund is not traded frequently, it is likely to have a wide bid-ask spread, further reducing investor interest.

One solution that a few ETF issuers have recently adopted involves building ETFs with a particular customer in mind. Back in...

SEC Charges Municipal Issuer with Misleading Investors

Yesterday, the Securities and Exchange Commission (SEC) charged the Greater Wenatchee Regional Events Center Public Facilities District, a group of nine cities and counties in Washington state, with misleading investors in connection with a bond offering meant to finance the construction of an event center. According to the press release, this is "the first time that the SEC has assessed a financial penalty against a municipal issuer."

In 2008, the municipal issuer issued nearly $42 million...

SLCG Research: Structured Product Indexes

Most research on structured products focuses on what is known as initial date mispricing -- the difference between what a product costs and how much it is worth, as of the issue date. If you look at any of our structured product reports (let's take this reverse convertible, for example), you can see that the product was issued at a price of $1,000, but that the present value of its resulting cashflows only comes out to $960.40. The difference, $39.60 or 3.96%, represents an expected loss to...

FINRA Investor Alert: Closed-End Fund Distributions

The Financial Industry Regulatory Authority (FINRA) recently released an Investor Alert to draw investors attention to the subtle difference between distributions and returns in the context ofclosed-end funds. Closed-end funds are pooled investments like mutual funds (which are also known as 'open-end funds'), but have only a fixed number of shares. This distinction has a big impact on how the fund is analyzed.

Distributions from closed-end funds are typically quoted as a rate (e.g. 6%). This...

The Consequences and Implications of TIC Investments

The research we have outlined all this week strongly suggests that TIC interests are exceptionally poor investments. We have focused our posts on what a thorough due diligence on the TICs should have revealed at the time of issuance. But you may be wondering, what happened to these TICs? What sort of returns did investors receive?

To our knowledge, there is no retrospective study of TIC returns. But in our experience, the vast majority of TIC properties suffered significant impairments during...

SEC Litigation Releases: Week in Review - November 1st, 2013

SEC Obtains Summary Judgment Against Defendants Charged with Defrauding Investors in Fictitious Offering
October 30, 2013, (Litigation Release No. 22861)
A summary judgment was entered againstthe Estate of Frank L. Pavlico, Brynee K. Baylor, her law firm Baylor & Jackson, P.L.L.C., and their former "client" The Milan Group, Inc. for their involvement in "a prime bank investment scheme that defrauded at least 13 investors out of more than $2 million." According to the SEC, "Pavlico and Baylor...

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