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 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.
Further on the Returns to Non-Traded REITs
By: Joshua Mallett, Craig McCann (May 2022)
Further on the Returns to Non-traded REITs, updates our 2015 paper including 51 additional nontraded REITs that came into existence after May 1, 2015 and either had had a liquidity event or updated their NAVs between May 1, 2015 and December 31, 2019. We documented that returns to nontraded REITs continue to fall substantially short of the returns to traded REITs. For all 140 nontraded REITs, the shortfall relative to traded REITs was at least $59.2 billion. This systematic underperformance was observed for the additional nontraded REITs launched since May 1, 2015 as well as for the nontraded REITs in existence on May 1, 2015. We also documented nontraded REITs' returns were lower than traded REIT returns for capital raised by nontraded REITs in every calendar quarter.
UBS's YES Was Not Same Iron Condor Product as at Credit Suisse
By: Craig McCann, Regina Meng, Edward O'Neal (Mar 2022)
Monthly returns from the Credit Suisse and UBS time periods - including for subperiods of similar characteristics UBS blames for the 2018 losses - show these two programs were very different and that UBS's program was much riskier and had much more directionality than the Credit Suisse program. We find market conditions in 2018 when YES lost 18.44% were much less dramatic than in 2008 when Credit Suisse lost only 2.42%
Impact of Zoom on FINRA Claimants
By: Craig McCann, Chuan Qin (Jan 2021)
SLCG presents a new study on the impacts that Zoom and other virtual meeting platforms have on the process of FINRA hearings, citing evidence that the newly updated process has a negative effect on those who are claiming.
UBS's Yield Enhancement Strategy ("YES") Returns - and then the Losses - Were Caused by Equity Market Exposure
By: Craig McCann, Regina Meng, Edward O'Neal (Oct 2019)
UBS marketed YES as market-neutral based on a combination of four options is sometimes referred to as an "Iron Condor". UBS accounts subjected to YES treatment suffered losses of 12% to 14% in December 2018 when the S&P 500 dropped 9.2% because the overlay was more than 100%
In this paper the authors we explain the option basics necessary to understand the YES strategy and illustrate how UBS actually implemented the strategy with predictably disastrous results. They also present how UBS described the strategy in its marketing materials.
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.
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.
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 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.
