January 29, 2020
I have been in the securities industry in one way or another since the 1960s. My father and uncle were partners in Merrill Lynch in the 60s and my grandfather was comptroller. Today, I am a securities regulator. During the years since that time I have witnessed a drastic change in the industry that began when they converted from partnerships to corporations. The change, in my opinion, has not been beneficial to the investing public. In the days of partnership, each partner's personal net worth was at risk and so, as I frequently witnessed while waiting for a ride home after high school, my father would personally review every order ticket that was written and executed that day in his office. I clearly remember on several occasions when I would be told to leave the office how he would storm out to the board room and return with a salesman, slam the door and chastise the person for an unsuitable trade.
When I went to work for Merrill in 1971, after serving in the United States Air Force, the culture had completely changed to one where all that mattered was commissions. That began a trend in my opinion that gathered steam over time to the present day. In the mid 1980s I managed a multi-billion-dollar institutional investment management company. Those were the days that saw the development of CMOs, asset backed securities with pleasure boats as collateral and more, all of which to generate profits by capturing the spread. More recently, we have had auction rate securities which turned out to be detrimental to the small investor.
Todays attempt to broaden the definition of accredited investor while not adjusting the dollar financial threshold of net worth and income will allow the street to sell to investors who are not capable of truly understanding what they are purchasing at the recommendation of their broker/ agent. It is not very had to meet the minimum requirements.
Private placements are high risk investments and not suitable for the general investing public. They are not price transparent, there is no public market and while there may in time develop an over the counter secondary market, the spreads will be enormous. In addition, with the implementation of Regulation Best Interest, it is debatable if they can be legitimately sold to the general investing public.