Geller Law
In the financial industry, conflicts of interest often arise in places that an investor would not expect. One such place is within exempt market dealer firms, where advisors are allowed to trade in the same securities alongside their clients. Advisors and dealers often fail to identify this as a material conflict of interest. In fact, an advisor's investment in private equity is a common tactic to get investors like you to buy high-risk and unsuitable securities.
This conflict of interest is material because it impacts the advisor's recommendations or decisions. For example, when an offering of securities is limited, the advisor could prioritize their own trade before recommending an investment to a client. Or, worse, promote the investment of a financially unstable company so that the advisor's own investment is not lost.For the client, it's not investing in securities, it is more like gambling on securities.
Similarly, when an advisor becomes aware that an issuer, which generally permits redemptions (e.g., monthly or quarterly) is about to freeze or gate redemptions, the advisor may act on that information at the expense of other investors/clients.
In addition to not identifying this conflict of interest, exempt market dealers often lack adequate controls to address this material conflict of interest in the best interest of investors. In effect, the dealer is sanctioning the advisor's wrongdoing.
Regulators expect dealers to establish policies, procedures, and controls related to personal trading by advisors and the fair allocation of investment opportunities.
Material conflicts of interest associated with trades alongside clients must be addressed in the client's best interest. Accordingly, when an offering of securities is limited, the exempt market dealer firm’s advisors and employees should not be allowed to trade in the issuer’s securities until all clients are informed and all orders from clients are fulfilled.
Furthermore, suppose a dealer becomes aware that an issuer that normally permits redemptions is about to freeze or gate redemptions. In that case, the advisor and the dealer's other clients' employees must not be allowed to redeem their own securities before all affected clients are informed and given the opportunity to redeem.
This may seem like common sense, but a common selling feature used by salespersons/advisors is to brag about how they and their friends and family also invest in private equities recommended to clients. Thus, the salesperson/advisor is bragging about what is NOT in the client's best interest, confusing a conflict of interest with the client's best interest. Is this a misrepresentation? A misdirection? A simple wrongdoing?
