FBR Head says Private Placements not for Retail

FBR boss says private placements not for retail

(Reuters) – Sales of unregistered equities are all the rage among wealthy investors, but one of the biggest underwriters of private placements says Wall Street banks should limit these deals to large institutions.

Recent efforts by Facebook, Twitter and other firms to sell equity outside the view of public markets revealed strong demand among the ultra-wealthy for investment opportunities beyond the traditional public stock offering.

But FBR Capital Markets Corp Chief Executive whose firm is the largest underwriter of 144A private placements, said banks only court trouble when they expand deals beyond institutions.

“I don’t think it’s a matter of broker-dealers pushing deals through their (private client) system because they can,” he said at the Reuters Future Face of Finance Summit.

But “with every step away from legitimate institutional buyers that you take,” he said, “you introduce more risk, bring in more need for regulation, and the higher likelihood that it’s going to be an inappropriate investment for some.”

FBR long has been a top underwriter of private placements, transactions that let companies — especially smaller or less-established ones — quickly raise capital.

Poorly vetted deals and insider-dealing have tainted this marketplace over the years, and regulators are cracking down on placements made to less sophisticated retail investors.

Richard Ketchum, CEO of the Financial Industry Regulatory Authority, said at a later session of the Reuters summit that private placements have become a “more significant part” of the options offered to a broader range of investors.

At the same time, he said, the poor quality of pricing and information disclosure around private placements over the years has given rise to frauds such as pump-and-dump scams.

Private placements still are very much on the front burner” in terms of enforcement matters, Ketchum said. “We see instances where firms are not focused as much as they should be from the standpoint of diligence and suitability.

FINRA, which supervises brokers and securities dealers, said some firms are not making sure their clients understand the risks of investing in illiquid vehicles with generally less visibility about their market value.

Less than six years ago, Emmanuel Friedman — the F in FBR — abruptly resigned as the firm’s chief executive amid a U.S. Securities and Exchange Commission probe of suspected insider trading in a 2001 private stock placement of Compudyne. Friedman paid a $1.2 million fine over failures in supervision.

Hendrix, in the earlier summit session, said the private placement market can continue to grow, but underwriters need to keep a tight rein on who can participate.

Private equity markets were briefly front-page news in 2007, Hendrix recalled, as Wall Street banks such as Goldman Sachs and Nasdaq created “portals” that let accredited investors trade shares issued through private placements.

These markets did not take off as some had hoped, and faded into the background until January, when Facebook’s plan to sell shares to select Goldman private wealth management clients became big news.

Ultimately, Goldman had to exclude U.S. clients from the offering, worried that the high-visibility transaction might run afoul of SEC disclosure rules.

Hendrix said FBR continues to maintain a portal for private placements called FBR Plus, available only to institutions such as pensions, endowments and large investment managers.

FBR Plus facilitates trading in 10 to 11 issues, he said, and the roster of companies tends to change every year or so. Trading volume is “sporadic,” he said.

“That part of the business will continue to exist and will probably grow over time,” Hendrix said.

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