Invesco tops the list of the firms carrying non-rated bonds. More than 64% of the Invesco High Income Municipal Bond Fund (AHMCX) and 61.3% of the Invesco Van Kampen High Yield Municipal Bond Fund (ACTHX) are in such bonds, according to research provided by Morningstar Inc.

Nuveen Investments LLC’s High Yield Municipal Bond Fund (NHMAX) has 46.9% in non-rated bonds, while Waddell & Reed‘s Municipal High Income Fund (UMUHX) has 44.9%, and OppenheimerFunds’ Rochester National Municipal Fund (ORNAX) has 43%.

Given the continuing headline risk in the muni bond market, funds with such large allocations to non-rated bonds risk having to meet massive redemptions and could get stuck with having to sell these less liquid bonds at lower prices, he said.

Because the bonds tend to be thinly traded, it can often be difficult to price them, experts said. This is a risk with all muni bonds but even more so for non-rated bonds, said Matt Fabian, managing director at Municipal Market Advisers.

“When you have uncertainty about what the bonds are worth and managers reporting the value on the bonds, you need to make sure they aren’t exaggerating the value of the bonds,” Mr. Fabian said.

The Wall Street Journal reported that the Securities and Exchange Commission is investigating whether muni bond fund managers are overstating the value of the riskiest bonds in their portfolios, thus misleading investors. As part of the investigation, the SEC is looking into funds’ holdings of non-rated bonds, according to reports.

SMALL ISSUERS

Non-rated bonds aren’t inherently bad.

Often these issuers don’t apply for a rating, because it would be too expensive, given their size. The average size of these issuers is $21 million, according to Municipal Market Advisers.

Bonds also can be non-rated because they aren’t investment-grade or they have been pre-refunded.

“As long as advisers understand the funds’ diligence process on these bonds, they can be great opportunities,” said Alan Dalewitz, a senior vice president at Herbert J. Sims & Co. Inc.

Officials at Invesco, Waddell & Reed, OppenheimerFunds and Federated Investors Inc. said that they all have analysts devoted to researching bond issuers, and their research process includes continual monitoring as well as site visits to the issuers. Each of the firms assigns its own internal ratings to the bonds, and monitors those ratings, executives said.

“Our team of 10 credit analysts spend all of their time looking at non-rated deals,” said Troy Willis, a vice president and senior portfolio manager of the Rochester funds at OppenheimerFunds.

In many cases, the firm can do better research on the bonds than the ratings agencies, said Michael Walls, a vice president and portfolio manager at Waddell & Reed. He said that ratings agencies “do a good job of giving a snapshot in a given period of time.”

But Mr. Walls said the agencies don’t conduct audits on a quarterly, let alone more frequent, basis.

For example, Waddell & Reed invests in a lot of muni bond issuers that finance construction in the life care field, such as nursing homes, and has a person on-site making sure that subcontractors are within their budgets and abiding by the proper construction guidelines, Mr. Walls said.

Similarly, Invesco has 33 analysts dedicated to muni bonds, Lyman Missimer, head of global cash management and municipals at Invesco, wrote in an e-mail.

POTENTIAL TROUBLE

But even firms with the most prudent diligence process can run into trouble if there is another run for the exits by muni fund investors, as there has been over the past few months.

Muni bond funds have seen $25 billion in outflows over the past 14 weeks, due largely to fears about mass defaults in the muni bond market, according to Lipper FMI.

And now with mass protests in Wisconsin and other states over budget cuts, as well as the recent news of the SEC investigation into muni bond funds, some in the industry worry about an even bigger exodus. Just last week, Jeffrey Gundlach, founder of DoubleLine Capital LP, predicted a sell-off in munis.

“A manager’s analysis of the bonds in the portfolio can be 100% on,” Mr. Jacobson said. “But if shareholders bolt from a fund, that can drive down price, and the funds have to lock in those losses.”

If you have questions about municipal bond investments you made, the securities attorneys of The White Law Group may be able to help.  For a free consultation, call the firm’s Chicago office at 312-238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions.

For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.

If you have questions about investments you made with Buchholz, the securities attorneys of The White Law Group may be able to help.  For a free consultation, call the firm’s Chicago office at 312-238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions.

For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.

The Securities and Exchange Commission announced the settlement with Merrill Lynch, which was acquired by Bank of America in January 2009 in a $20 billion deal forged at the height of the financial crisis.  Merrill Lynch neither admitted nor denied the allegations under the settlement but agreed to refrain from future violations of the securities laws.

The SEC said the violations occurred from 2002 to 2007. The agency said Merrill Lynch’s equity strategy desk obtained information on institutional customers’ orders from other traders and used it to make trades on Merrill Lynch’s behalf. That was done even though the firm had told customers their order information would be kept on a strictly need-to-know basis, the SEC said.

It also said that New York-based Merrill Lynch charged some institutional and wealthy customers undisclosed trading fees.

The sweeping financial overhaul law enacted last summer limits proprietary trading by banks, or trading on their own account for their own profit. Charlotte, N.C.-based Bank of America Corp. is cutting about a third of its proprietary trading jobs to comply with the new restrictions.

The SEC said it took into account corrective actions taken by Merrill Lynch after it was acquired by Bank of America in deciding to accept Merrill Lynch’s offer of the $10 million civil fine.

Bank of America agreed to pay $150 million in a 2009 settlement with the SEC of civil charges that it misled shareholders when it acquired Merrill Lynch. The agency had accused Bank of America of failing to disclose to shareholders before they voted on the Merrill Lynch deal that it had authorized Merrill Lynch to pay as much as $5.8 billion in bonuses to its employees in 2008 even though the firm lost $27.6 billion that year.

If you have questions about investments you made with Merrill Lynch, the securities attorneys of The White Law Group may be able to help.  For a free consultation, call the firm’s Chicago office at 312-238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions.

For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.

Players will learn how to choose the right financial professional and how to do a background check. Players also will learn about the risks of taking on debt. NFL Player Development and NFL Security, in collaboration with the FINRA Foundation, have launched this initiative to reach players through 60- minute presentations, along with information booths in main traffic areas that will provide FINRA Foundation and NFL resources.

NFL Player Development and NFL Security are working together to tackle the problems posed by a lack of knowledge about how to manage the financial advisor selection process. The NFL’s work with the FINRA Foundation will bring needed resources and tools to players and their families so that they can protect themselves from fraudulent and deceptive practices.

Unfortunately, athletes are often targeted by unscrupulous brokers.  Hopefully this program will better prepare NFL athletes to select trustworthy advisors.

If you have questions about investment fraud, the securities attorneys of The White Law Group can help.  For a free consultation, please call the firm’s Chicago office at 312-238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions.

For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.

Have you suffered investment losses in the Cole Credit Property Trust REIT? The White Law Group may be able to help.

The White Law Group is investigating potential securities fraud claims on behalf of investors who purchased risky REIT investments like Cole Credit Property Trust REIT at the recommendation of their financial advisor or brokerage firm.

FINRA recently announced that it is paying close attention to the sale of REITs and, in particular, the ways in which broker/dealers marketed and sold the products to investors. In many cases, and notwithstanding the risk of REIT investments, broker-dealers marketed these investments as safe and secure.  Non-traded REITs are often one of the higher commission products sold by a brokerage firm (often explaining the firm’s reason for recommending the investment).

To determine whether you may be able to recover investment losses incurred as a result of your purchase of Cole Credit Property Trust REIT, please contact The White Law Group at 312-238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions.

For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.

The White Law Group is investigating potential securities fraud claims on behalf of investors who purchased risky REIT investments like Lightstone Value Plus REIT at the recommendation of their financial advisor or brokerage firm.

FINRA recently announced that it is paying close attention to the sale of REITs and, in particular, the ways in which broker/dealers marketed and sold the products to investors. In many cases, and notwithstanding the risk of REIT investments, broker-dealers marketed these investments as safe and secure.  Non-traded REITs are often one of the higher commission products sold by a brokerage firm (often explaining the firm’s reason for recommending the investment).

It appears that Lightstone Value REIT has declined in value and that investors are unable to redeem their investment.

To determine whether you may be able to recover investment losses incurred as a result of your purchase of Lightstone Value Plus REIT, please contact The White Law Group at 312-238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. The White Law Group’s experiences attorneys are dedicated to helping investors defrauded in securities, investment and financial business transactions.

For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.

New rules have been implemented requiring full disclosure of these commissions, and even more rules are being contemplated.  The following is a brief overview of those FINRA Rules, as well as some of the relevant case law that discusses a brokerage firms obligation to perform due diligence on a private placement investment prior to recommending it to any of its clients.

The first significant rule that applies in private placement fraud cases is NASD Rule 2310.  NASD Rule 2310 states that a brokerage firm must have a reasonable grounds to believe that a customer recommendation to purchase, sell or exchange a security (including a private placement investment) is suitable for the customer. See, also FINRA Notice to Member 03-71 concerning non-conventional investments and Notice to Member 05-18 concerning private placements of tenants-in-common interests.

This suitability analysis has two principal components.  First, the “reasonable basis” suitability analysis requires the brokerage firm to have a reasonable basis to believe, based on a reasonable investigation, that the recommendation is suitable for at least some investors.  This is where certain private placements, such as Medical Capital, DBSI, and Provident, fail the suitability test.  Had brokerage firms perform the proper amount of due diligence on these investments, the firms would have realized that ponzi schemes are obviously not appropriate investments for any investors.

The second prong, is the “customer specific suitability analysis, which requires that the brokerage firm determine whether the security is suitable for the customer to whom it would be recommended.  This is often referred to as the Know Your Customer Rule, but in essence, brokerage firms are required to account for a client’s age, investment experience, net worth, and investment goals in determining whether an investment is appropriate for a particular client.  Private placements often fail the suitability test for this reason.  Private placements, by there very nature, are often risky investments, which are virtually never appropriate for conservative or retired investors.

In addition to determining suitability, brokerage firms have a high due diligence requirement.  Specifically, brokerage firms are charged with exercising a high degree of case in investigating and independently verifying an issuer’s representations and claims.  Additionally, when an issuer is seeking to finance a new speculative venture, a broker dealer can not blindly rely on the issuer’s representations and are required to be particularly careful in this instance and must verify the issuer’s obviously self-serving statements.

A brokerage firm has an even greater responsibility to perform due diligence on a specific investment if the firm is deemed to be affiliated in some way with the issuer.  This can occur if the brokerage firm assists the company in preparing the private placement memorandum or if there are red flags present.

Finally, brokerage firms are required to follow NASD Rule 3010 and to ensure that the firm’s personnel, including its registered representatives, comply with their legal and regulatory requirements.

Much of the foregoing is discussed in FINRA Regulatory Notice 10-22 on Regulation D offerings.

Brokerage firms are also required to follow FINRA Rule 5122 when dealing with private placements.  FINRA Rule 5122 was developed in response to abuses in the sale of private placements issued by broker-dealers and their control entities.  The Rule generally requires that a member firm or associated person (financial advisor) engaging in a private placement of unregistered securities issued by the firm:

(1)   disclose to investors in a private placement memorandum, term sheet or other offering document the intended use of offering proceeds, the offering expenses and the amount of compensation that will be paid to the broker-dealer and its associated persons;

(2)  submit the offering documents to the FINRA Corporate Financing Department; and

(3)  comply with the requirement that at least 85% of the offering proceeds raised may not be used to pay for offering costs, discounts, commissions or any other cash or non-cash incentives.

Obviously, the big one here is the disclosure of the commission paid.  In many cases we have handled, the commission is either not disclosed or is disclosed in such a way that an unsophisticated investor cannot determine the commission paid to the brokerage firm making the representation.  Private placements often pay a commission far in excess of other traditional types of investments (sometimes as high as 8-10%) and investors would certainly be more concerned about making such an investment if they knew that the broker was being paid this commission.

For more information on FINRA Rule 5122 look at FINRA Regulatory Notice 11-04.

If you have additional questions about private placements or are concerned about a private placement investment you made through a brokerage firm, the securities attorneys of The White Law Group may be able to help.  For a free consultation, please call the firm’s Chicago office at 312-238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions.

For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.

If you have questions about investments you made with one of these firms, The White Law Group may be able to help.  For a free consultation, please call the firm’s Chicago office at 312-238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions.

For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.

The municipal bond arbitrage strategy employed by this fund was risky and exposed investors to significant losses.

It appears that 1861 Capital Management Fund was marketed to clients as a fixed income product offering slightly higher returns than a municipal bond.  In reality, the trading strategy employed by the fund was far riskier.  Based on the way the product was marketed, investors (many of them retirees) reasonably believed that their investment in this fund was conservative.

Various brokerage firms, including UBS, sold this product to many of their high net worth clients.

If you have questions about investments you made in the 1861 Capital Management fund, The White Law Group may be able to help.  For a free consultation, please call the firm’s Chicago office at 312-238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions.

For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.

Private placements are often one of the higher commission products sold by brokerage firms and the proposed amendment to the rule is likely in response to the high number of private placements that were sold over the last couple of years by brokerage firms.  Some of these private placements, like Medical Capital and Provident Royalties, were sold by brokerage firms even though it appears that these investments were fraudulent.  Perhaps if the commissions brokerage firms earned in recommending these investments had been more adequately disclosed, investors would not have invested in them.

If you have questions regarding about a private placement you purchased, the securities attorneys of The White Law Group may be able to help.  For a free consultation, call the firm’s Chicago office at 312-238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida. With over 30 years of securities law experience, including experience working at FINRA (f/k/a the NASD) and the SEC, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions.

For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.