BDCs first emerged in the early 1980’s when the U.S. Congress enacted legislation that amended the federal securities laws. These legislative changes allowed BDCs — which are a type of closed-end fund — to make investments in developing companies and firms. BDCs are in the business of providing various debt and mezzanine financing solutions for small and medium-sized businesses that otherwise could not access credit in the same way as more established companies.

By providing credit solutions to less established companies, BDCs frequently collect much higher than average interest income and seek to pass along such income to investors in the form of dividends. While an investment in a BDC may seem like an attractive option for an investor seeking enhanced income, our office has frequently encountered situations in which financial advisors recommended unsuitable nonconventional investment products to their clients, including non-traded BDCs, such as FSEP.

An investment in a BDC carries the same risks associated with other non-traded investment vehicles. These risks include, but are not limited to: excessive front-end fees (as high as 10%) to the soliciting broker and his or her firm, in addition to the illiquid nature of such non-traded investments. In fact, FINRA has offered the following cautionary guidance regarding such liquidity concerns: “Due to the illiquid nature of non-traded BDCs, investors’ exit opportunities may be limited only to periodic share repurchases by the BDC at high discounts.”

FSEP is managed by Franklin Square, a firm specializing in alternative investment funds. As of September 2015, Franklin Square managed approximately $17 billion in total assets, including $15.7 billion in BDC assets, thus making Franklin Square the largest manager of BDCs. A review of recent SEC filings indicates that FSEP closed its public offering in November 2016.

Investors who wish to exit their FSEP investment position are limited in their options due to the Fund’s illiquidity. For example, investors seeking to redeem their shares directly through Franklin Square need to wait until the Fund makes a quarterly tender offer, or wait until a future liquidity event transpires that may not occur for a number of years. According to SEC filings, on December 29, 2017, the Fund announced a decrease in the price of shares issued under the dividend reinvestment plan (‘DRIP’) to $6.70 from $7.15 a share.

Moreover, while a secondary market to sell FSEP does exist, it is fragmented and relatively inefficient. For example, Central Trade and Transfer recently listed shares of FSEP with a bid-ask spread of $6.60 – $6.85 per share. The recent pricing in the Fund — both through SEC filings by FSEP and through the secondary market — suggests that investors in this non-traded BDC may well have suffered considerable investment losses of approximately 35% on their initial investment (which does not include distributions paid to date). With respect to distributions, FSEP recently announced a reduction in the amount of their dividend: a decrease of nearly 30%. Particularly for income-oriented investors, this is not a favorable sign.

If you have invested in FSEP, or another non-traded alternative investment product, and you have suffered losses (or are currently unable to exit your illiquid investment position without incurring losses), you may be able to recover your losses in FINRA arbitration. Investors may contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or via email at newcases@investorlawyers.net for a no-cost, confidential consultation.

Alternative investments can include a variety of products, including oil and gas partnerships, hedge funds, non-traded real estate investment trusts (REITs), business development companies (BDCs) and other related categories. Though LPL Financial set forth guidelines to manage investment concentration, FINRA reports that from January 2008 until July 2012, there was no internal effort to enforce these guidelines. As a result, some clients may have received investment advice that resulted in levels of concentration that were excessive.

If you suffered significant losses as a result of an unsuitable recommendation to purchase or over-concentrate your portfolio in non-conventional investments (whether from LPL or another stockbroker or financial advisor), you may be able to recover your losses through securities arbitration. To find out more about your legal rights and options, contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.

These investments included:

• Non-traded real estate investment trusts, or REITs
• Oil and gas partnerships
• Business development companies, or BDCs
• Hedge funds
• Managed futures
• Other illiquid pass-through investments

For many alternative investments, offering documents, state regulations and the firms themselves impose concentration limits. FINRA’s investigation found that LPL did not adequately supervise alternative investment sales from January 1, 2008 to July 1, 2012 and, as a result, these concentration limits were allegedly violated. In addition, LPL’s supervisory staff allegedly was not adequately trained in analyzing suitability standards.

According to stock fraud lawyers, firms have an obligation to properly supervise their brokers and fully disclose all the risks of a given investment when making recommendations. In addition, those recommendations must be suitable for the individual investor receiving the recommendation given their age, investment objectives and risk tolerance. Securities fraud attorneys believe that many LPL customers may be able to recover losses for unsuitable alternative investments.

“In order to sell alternative investments, a broker-dealer must tailor its supervisory system to these products,” FINRA Executive Vice President and Chief of Enforcement Brad Bennett stated. “LPL exposed customers to unacceptable risks by not having an adequate system in place that could accurately review whether a transaction complies with suitability requirements imposed by the states, the product issuers and the firm itself — and it failed to train its registered representatives to apply all the suitability guidelines appropriately.”

If you were an LPL customer who received an unsuitable recommendation of non-traded REITs, oil and gas partnerships, managed futures, BDCs or other illiquid investments, you may have a valid securities arbitration claim. To find out more about your legal rights and options, contact a stock fraud lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.