FINRA and SEC Launch Inquiries of Brokerage Firms that Sold GPB Capital Funds

The smoke emanating from the GPB Funds continues to build. As detailed in our post from November, the 1.8 billion-dollar GPB Capital Funds have been raising eyebrows for a few months now. Back in September, Massachusetts Secretary of State William Galvin announced an investigation into 63 brokerage firms that sold investments in GPB to its clients. According to a recent Investment News report, both FINRA and the SEC have now also inquired into brokerage firm sales practices connected to the GPB Capital Funds.

According to published reports, GPB paid brokerage firms a 12% commission to sell its speculative, high-risk private placements to retail investors.  This sort of commission is the driving force behind brokerage firms selling private placements. By comparison, a brokerage firm will generate a commission of about 1% on a stock trade and perhaps as high as 5% on a Class A mutual fund.  With the increasing popularity of cheap alternatives like Index Funds which only generate commissions of less than 0.5% in most instances, it is clear why brokerage firms peddle speculative investments like those issued by GPB Capital. A financial advisor would have to sell a lot of stocks and bonds to generate the same amount of commissions.

For example, if a financial advisor sells an investor a $100,000 unit of one of the GPB Capital private placements, the advisor and his firm would be paid $10,000-$12,000 for making this sale. If on the other hand, the advisor instead sold the investor a basket of Dow 30 stocks for $100,000, the take would be only $1,000-$2,000.  This advisor would have to sell over a million dollars of stocks to this client to make the same commissions.  Plus, selling a basket of stocks and bonds requires ongoing professional service and advice from the financial advisor.  Issues related to rebalancing and market volatility require ongoing financial advice.  Financial Advisors love selling private placements like those offered by GPB Capital because they feel like they can sell it and forget it. These private placements do not price to a market daily, creating the illusion that they are stable and that an investor’s principal is safe. It is really a no brainer for your trusted financial advisor.

Advisors and their firms justify these ridiculous commissions by arguing they earn it from all of the extensive due diligence they perform on private placements like GPB Capital prior to selling them to their clients.  FINRA RN 10-22 and FINRA Rule 2111.05 require brokerage firms to perform this due diligence to ensure, before selling these investments, that they are suitable for at least some clients. The reality is, most brokerage firms barely kick the tires on these private placements and usually simply collect a bunch of paper for their files as opposed to actually analyzing the legitimacy of the investments or ensuring the representations made by the issuer like GPB Capital are truthful and realistic.

If you invested money in the GPB Capital Funds, call Stoltmann Law Offices, P.C. today at 312-332-4200 for a free, no obligation consultation with an attorney.

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