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Research Papers

Our experts have published extensively in peer-reviewed journals. Pre-publication versions of these papers plus other working papers are available below.

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Regulation D Offerings: Issuers, Investors, and Intermediaries

The Reg D offering market is similar to the public offering market in terms of total amount of capital raised and has been growing rapidly over recent years. The proceeds sold through Reg D offerings between 2021 and 2022 equal $4.4 trillion, 13% more than the public offering proceeds during the same period and a 46% increase over the Reg D offering proceeds during 2019-2020. Reg D securities have been sold to increasingly more investors per offering with less amount sold to each investor over the past decade, suggesting an increasing participation in unregistered offerings by retail investors. Broker-dealers and registered investment advisers (RIA) play an important role in reaching retail investors: Offerings sold by broker-dealers with a larger retail clientele and offerings sponsored by RIAs with more highnet- worth individual clients are sold to more investors and raise less capital from each investor. Investors must be wary of potential misconduct and conflicts of interest when hiring intermediaries for investments in unregistered securities. Broker-dealers receiving a higher rate of sales commissions and those specializing in Reg D offerings tend to receive more customer complaints arising from unregistered securities. RIAs advising non-fund clients are more likely to disclose a conflict of interest in regulatory filings when they sponsor Reg D offerings, indicating that these advisers invest their own clients' funds in self-sponsored unregistered securities.

Puerto Rico Securities Arbitration Settlements and Awards Likely to Exceed $1.25 Billion (Updated May 15, 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)

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

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)

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)

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

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?

Published in The Journal of Index 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

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.

Efficient Valuation of Equity-Indexed Annuities Under Lévy Processes Using Fourier-Cosine Series

Published in The Journal of Computational Finance, Vol 21, No. 2, September 2017.

Equity-Indexed Annuities (EIAs) are deferred annuities which accumulate value over time according to crediting formulas and realized equity index returns. We propose an efficient algorithm to value two popular crediting formulas found in EIAs - Annual Point-to-Point (APP) and Monthly Point-to-Point (MPP) - under general Lévy-process based index returns. APP contracts observe returns of referenced indexes annually and credit EIA accounts, subject to minimum and maximum returns. MPP contracts incorporate both local/monthly caps and global/annual floors on index credits. MPP contracts have payoffs of a "cliquet" option.

Our algorithm, based on the COS method (Fang and Oosterlee, 2008), expands the present value of an EIA contract using Fourier-cosine series, expresses the value of the EIA contract as a series of terms involving simple characteristic function evaluations. We present several examples with different Lévy processes, including the Black-Scholes model and the CGMY model. These examples illustrate the efficiency of our algorithm as well as its versatility in computing annuity market sensitivities, which could facilitate the hedging and pricing of annuity contracts.

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