Three broker-dealers under the umbrella of the Advisor Group network of firms have increased reserves for upcoming “legal and regulatory matters,” according to annual financial statements filed recently with the Securities and Exchange Commission.
Of the five Advisor Group broker-dealers that have so far filed their 2020 financial statements, called Focus Reports in the industry, three, Royal Alliance Associates Inc., SagePoint Financial Inc., and FSC Securities Corp., boosted their legal reserves by as much as three times the amount of the prior year. Two other firms, Securities America Inc. and Woodbury Financial Services, cut their reserves.
Added up, those five firms in the network last year increased the amount set aside for future legal and regulatory issues by close to $4.4 million.
None of the three firms that increased legal reserves specify what the pending legal and regulatory issues are, according to their Focus Reports.
And one firm, Triad Advisors, has yet to file its Focus Report. Last year, Triad Advisors reported its legal woes were increasing due to sales of GPB Capital private placements, which last month was charged with fraud by the SEC and saw the arrest of three senior executives by the FBI.
GPB filings for their two largest private placements, GPB Holdings II and GPB Automotive Portfolio, lists dozens of broker-dealers that sold the high-risk, high-commission product, including all the Advisor Group broker-dealers except for Securities America. It is not clear how much those five Advisor Group firms sold of GPB private placements.
All broker-dealers are required to file a public audited financial statement two to three months after the close of their fiscal year, so most firms report at the end of February of start of March. The reports are a window into the financial workings and health of each firm, and includes potential liabilities for legal and regulatory issues.
Listing such legal and regulatory reserves is harbinger for future potential issues. And millions of dollars of legal costs can eat into profit margins at some of independent broker-dealers, some of which operate on notoriously thin margins of the mid-to-low single digits.
When asked whether the increase in reserves stemmed from brokers’ sales of GPB private placements, a spokesperson for Advisor Group declined to comment. “We don’t comment on specific legal reserves,” he wrote in an email. “As a percentage of our total revenue, reserves are in line with our expectations.”
Royal Alliance reported reserves for legal and regulatory issues of $5 million at the end of 2020 compared to $1.3 million a year earlier, while SagePoint Financial had accrued $2 million at the end of last year versus $420,000 at the end of 2019, according to the firms’ Focus Reports. FSC Securities Corp. also boosted legal reserves to $1.3 million from $430,000 over that same period.
Securities America decreased its reserves for the 12 months ending in December to $1.4 million from $2.9 million, while Woodbury Financial’s dropped to $1.9 million from $2.2 million.
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