David Lerner Associates is the center of FINRA's latest due diligence complaint, this time over the suitability of proprietary REIT securities that the regulator says were too aggressively sold and too lightly researched.
FINRA's problem with DLA's sales practices does seem a little confusing. The official complaint lambastes the firm's marketing tactics and disclosure, but then classifies those practices as "failing to conduct adequate due diligence."
According to FINRA, the REITs in question should be considered dangerous because they are illiquid and have been increasingly leveraged in order to achieve their stated performance goals.
Because DLA did not disclose these red flags -- and went on selling the securities anyway -- FINRA concludes that the firm must not have done its homework.
Much of the rest of the complaint goes on to attack the firm's marketing practices.
DLA is fighting this one, calling the case against it "baseless" and blaming the sudden interest in "due diligence" on regulators' guilt over failing to catch ponzi schemes like Bernie Madoff on their own.
This is going to be tricky. On the one hand, the REITs in question represent a much more concentrated part of DLA's sales program than bad medical debt ever amounted to at much bigger firms like Securities America.
Securities America, with over 1,900 advisors in the network, only sold $700 million in Medical Capital Holdings paper, and "due diligence" complaints almost wrecked the firm -- even though insiders tell me that all the homework on these instruments was done up to standard.
DLA has only 375 advisors but over the years has sold $6.8 billion in REIT shares from the companies under the microscope here over the years, $300 million of it since January. FINRA estimates that these assets represent 60% of the firm's total business.
The firm's sales practices have definitely received their share of investor criticism.
But if the working definition of "due diligence" is shifting from "finding out all you can" to "disclosing all the red flags that exist" then we may be seeing a lot more of this kind of regulator action in the future.