Investment Fraud Lawyer Blog

The Financial Industry Regulatory Authority (FINRA) is taking a closer look at a fast-growing alternative investment known as a non-traded business development company (BDC). According to InvestmentNews, FINRA spokeswoman Nancy Condon states, “we are looking at a number new products being sold to investors and BDC’s are one of them.” BDC’s are typically closed-end funds regulated under the Investment Company Act of 1940. BDC’s were created in 1980 by Congress in order to provide small companies with funding.

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Given the array of exotic alternative investments being sold to the public, it’s logical that many investors often don’t understand what they are buying. What is even scarier is that it is likely their professional investment adviser doesn’t understand the alternative investment either. Investment advisers – 75 percent of them – admit they do not understand alternative investments. Notwithstanding their puzzlement, 50 percent of advisers said they intend to increase their use of them in their clients’ accounts this year. They could use some help, however, because of alternative investments are so confusing. (“Alternatives spur anxiety,” InvestmentNews).

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The SEC is scrutinizing mutual funds’ fee arrangements, looking for instances of gouging, and finding plenty of them. Morgan Stanley just agreed to pay $3.3 million for its role facilitating over $1.8 million in payments by a mutual fund to a third party for services the fund did not receive (“Morgan Stanley Settles SEC Case,” Wall Street Journal). Many more such cases are expected in coming months.

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When world markets move significantly in apparent response to major macroeconomic news, even supposedly “uncorrelated assets” move in unison with them, according to Jason Zweig’s Wall Street Journal article, “Caging Raging Contagion.” Such a significant move occurred last week when the Italian government and bonds collapsed over its fiscal problems, and everything else fell, too.

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Investors have lost $1 billion investing in initial public offerings of closed-end mutual funds – on average 22% of their money – between January and August, 2011. Popular Wall Street Journal columnist Brett Arends suggests that the investors in these closed-end funds have been scammed.

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Investors should use extreme caution before investing in alternative investments. Alternative investments have become the popular “investment du jour" but these investments are fraught with risks. Simply stated, alternative investments are not the panacea that so-called experts represent them to be. For the reasons discussed below, investors need to be very skeptical of any recommendation encouraging them to invest in alternative investments.

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