Regulation D Offerings: Issuers, Investors, and Intermediaries
By: Craig McCann, Chuan Qin and Mike Yan (Sep 2023)
The Reg D offering market is similar to
the public offering market in capital raised and has been growing
rapidly over recent years. The proceeds from Reg D offerings sold
between 2021 and 2023 total $6.2 trillion, 23% more than the capital
raised in registered offerings over the same period and a 86%
increase over the proceeds from Reg D offerings sold during 2011-2013. Reg D securities have recently been sold to more investors
per offering with a less amount sold per investor, suggesting an
increasing retail preference for unregistered securities. Intermediaries
play an important role in reaching retail investors. Offerings
sold by broker-dealers with more retail clients and offerings sponsored
by investment advisers with more wealthy individual clients
are purchased by more investors per offering and raise less capital
per investor. Investors of unregistered offerings must be wary of
intermediariy misconduct and conflicts of interest. Broker-dealers
that receive more commissions and specialize in selling unregistered
offerings tend to receive more customer complaints stemming from
unregistered securities. Investment advisers with non-fund clients
are more likely to disclose conflicts of interest in regulatory filings
when they sponsor Reg D offerings, indicating that they allocate
client funds in self-sponsored unregistered securities.
Diversifying a Concentrated Stock Position in 2023
By: Susan Song, Regina Meng, Mike Yan and Craig McCann (Jun 2023)
Twenty years ago, we evaluated brokerage firms' recommendation that investors
should diversify a concentrated stock position by buying additional stocks on margin[McCann and Luo, 2003]
Twenty years later, some brokers and advisors continue to recklessly recommend
that their clients borrow against concentrated stock positions and purchase additional
stocks to diversify. In this note, we use recent stock market returns to update our previous work which used data from the 1990s. We also extend the analysis to cover a larger universe of stocks and employ more sophisticated simulations. Our updates and enhancements show that this "hold, borrow, and buy some more" strategy remains inconsistent with basic principles of prudent investment management; leveraged diversification perversely increases risk and or lowers expected returns.
Puerto Rico Securities Arbitration Settlements and Awards Likely to Exceed $1.25 Billion (Updated May 15, 2019)
By: Craig McCann, Edward O'Neal, Chuan Qin and Mike Yan (Jun 2019)
SLCG releases its updated Puerto Rico Securities Arbitration Report showing over $600 million paid out so far in settlements and awards with a similar amount likely to be paid out in coming years as a result of brokerage firm customers losses in Puerto Rico.
Reporte de Arbitrajes de Valores en Puerto Rico: entre Acuerdos Transaccionales y Laudos Arbitrales seguramente se excederá de $1.25 billon (15 de may de 2019)
By: Craig McCann, Edward O'Neal, Chuan Qin and Mike Yan (Jun 2019)
SLCG publica su Informe de Arbitraje de Valores de Puerto Rico actualizado que muestra más de $600 millones pagados hasta el momento en acuerdos y adjudicaciones con una cantidad similar que probablemente se pagará en los próximos años como resultado de las pérdidas de clientes de la firma de corretaje en Puerto Rico.
Rating Brokerage Firms by Their Complaint Histories Rather Than by Their Brokers' Histories
By: Craig McCann, Chuan Qin and Mike Yan (Aug 2017)
In our previous research, we ranked brokerage firms based on the proportion of their brokers on December 31, 2015 who had been associated with at least one resolved customer complaint. That approach assigns a higher ranking to a firm if a larger proportion of its current brokers have one or more resolved customer complaint in their career, regardless whether the complaints occurred at their current employer or at a prior employer.
Our new research ranks brokerage firms based on the frequency of customer complaints over conduct at each firm, including both resolved and pending. That is, we rank firms based on their history rather than on their current brokers' histories.
Puerto Rico Securities Arbitration Settlements and Awards Sure to Exceed $1 Billion (Updated November 15, 2018)
By: Craig McCann, Edward O'Neal, Chuan Qin and Mike Yan (Feb 2017)
In 2013, a shrinking economy and the government's loss of continued access to capital markets necessary to make interest payments, refinance principal coming due and to fund an unsustainable government deficit caused Puerto Rico tax exempt bond prices to fall substantially.
Puerto Rico brokerage firms' customers held poorly diversified securities accounts, concentrated in Puerto Rico municipal bonds or closed end funds that held leveraged portfolios of Puerto Rico municipal bonds. Often these accounts were further leveraged using margin debt, lines of credit or proceeds from non-purpose loans recycled through third-party banks.
Reporte de Arbitrajes de Valores en Puerto Rico: 2,983 Reclamaciones, $470 millones en Acuerdos Transaccionales y Laudos Arbitrales Hasta la fecha (07 de septiembre de 2018)
By: Craig McCann, Chuan Qin y Mike Yan (Feb 2017)
SLCG publica su Informe de Arbitraje de Valores de Puerto Rico actualizado que muestra más de $600 millones pagados hasta el momento en acuerdos y adjudicaciones con una cantidad similar que probablemente se pagará en los próximos años como resultado de las pérdidas de clientes de la firma de corretaje en Puerto Rico.
Structured Products and the Mischief of Self-Indexing
By: Geng Deng, Craig McCann and Mike Yan (Oct 2016)
Published in The Journal of Index Investing, Spring 2017, Vol. 7, No. 4, pp. 16-29.
In recent years, investment banks have issued structured products linked to indexes they create rather than just linking to standardized indexes from Standard & Poor's. In doing so, the issuers create additional difficulties for retail investors to understand these, sometimes complex, investments. We illustrate the potential conflicts of interest created with structured products linked to proprietary volatility indexes although the conflicts are present in other proprietary index based investments as well.
In the 1990s, investment banks switched from underwriting reverse convertibles and tracking securities issued by operating companies like Citicorp and Reynolds Metals linked to their own stock to issuing and underwriting structured products linked to unrelated publicly traded companies like Cisco Systems. This change in investment banks' role led to a dramatic proliferation of new issuances and ever more complicated payoff structures since the underwriters were no long limited to underwriting securities other companies wanted to issue. Investment banks could now issue notes in relatively small denominations linked to publicly traded companies that the brokerage firms could then sell through their retail sales force. The complexity of these notes made regulatory oversight more difficult and allowed issuers to sell structured products with very low issue date values.
How Widespread and Predictable is Stock Broker Misconduct?
By: Craig McCann, Chuan Qin, and Mike Yan (Apr 2016)
Published in The Journal of Investing, Summer 2017, Vol. 26, Issue 2, pp. 6-25.
In this paper we reconcile widely diverging recent estimates of broker misconduct. Qureshi and Sokobin report that 1.3% of current and past brokers are associated with awards or settlements in excess of a threshold amount. Egan, Matvos, and Seru find that 7.8% of current and former brokers have financial misconduct disclosures including customer complaints, awards, and settlements.
We replicate and extend the analysis of broker misconduct in these studies. Qureshi and Sokobin arrive at their low estimate by excluding 85% of all brokers, including those brokers most likely to have engaged in misconduct. Applying Qureshi and Sokobin's restrictive definition of potential misconduct to all brokers, we find that misconduct is much more widespread.
We also evaluate Qureshi and Sokobin's claim that its BrokerCheck website provides helpful information to investors seeking to avoid bad brokers and answer the question posed by Egan, Matvos, and Seru: If BrokerCheck data can identify broker misconduct, why don't investors use that data to protect themselves? We find that BrokerCheck is worthless in its current hobbled form, but that it could easily be modified so that market forces might substantially reduce broker misconduct.
Ex-post Structured Product Returns: Index Methodology and Analysis
By: Geng Deng, Tim Dulaney, Tim Husson, Craig McCann, and Mike Yan (Apr 2014)
Published in The Journal of Investing, Summer 2015, Vol. 24, No. 2: pp. 45-58.
The academic and practitioner literature now includes numerous studies of the substantial issue date mispricing of structured products but there is no large scale study of the ex-post
returns earned by structured product investors. This paper augments the current literature by analyzing the ex-post returns of nearly 18,000 individual structured products issued by
13 brokerage firms since 2007. We construct our structured product index and sub-indices for reverse convertibles, single-observation reverse convertibles, tracking securities, and auto-callable securities by valuing each structured product in our database each day.
The ex-post returns of US structured products are highly correlated with the returns
of large capitalization equity markets in the aggregate and individual structured products
generally underperform simple alternative allocations to stocks and bonds. The observed
underperformance of structured products is consistent with the significant issue date under-pricing documented in the literature.
