(Dow Jones) The demise of yet another broker-dealer, QA3 Financial Corp., has made brokers more cautious than ever about putting private placements and other alternative investments in clients' portfolios.
Many investors had been clamoring for access to products like private placements, limited partnerships and non-traded real estate investment trusts. But damage claims arising from some allegedly fraudulent placements have forced a number of broker-dealers out of business over the past year and left others wary.
At the same time, stiffened regulation and shrunken portfolios have meant fewer investors who qualify, or have the means, to partake in those deals that are trusted.
QA3 Financial, based in Omaha, Neb., last Friday told its more than 400 brokers that it planned to close its doors Feb. 11, according to a published report. The firm reportedly faced bankruptcy over investors' damage claims related to sales of private placements that, according to regulators, turned out to be fraudulent. Those Regulation D investments included Medical Capital Holdings Inc. and Provident Royalties LLC.
Steve Wild, QA3's owner and chief executive, did not return calls seeking comment this week.
Brokers are concerned about selling private placements and similar products, said Dana Vietor, president of Workman Securities Corp., an Eden Prarie, Minn.-based broker-dealer with about 170 brokers. In an upcoming meeting set with reps, they've put a discussion of what's going on in the marketplace on the agenda, Vietor said.
"They're absolutely, 100% worried. I think that's universal. When a QA3 or a GunnAllen goes under, all brokers are worried," he said. GunnAllen Financial Inc. of Tampa, Fla., shut down last year, crippled by investor claims stemming from its sale of private placements including Provident Royalties.
Alternative investments now account for about 6% of Workman Securities' business, Vietor said.
"We have about 20% of the products that we had as little as six months ago on our platform to sell," said Vietor. "Of those 20%, we are continuing to do due diligence to make sure we even want to keep them. We're not getting new deals brought to us at all."
Workman Securites uses only Regulation D products, such as REITS and private placements, and doesn't use any private notes, Vietor said. It consolidated its platform to eliminate similar alternative investments and to use only the top sponsors, he said.