GPB flies under 10% commission barrier

SEC BI Rule in flux-ish
June 20, 2019
FINRA Investments Decline
July 3, 2019

GPB flies under the 10% commissions cap. Pays 9.3% on the firm’s private placements

According to a recent article by InvestmentNews Reporter Bruce Kelly, GPB Capital paid $167 million in fees to broker-dealers and their reps who sold the firm’s private placements. That might sound like good news except that the value of GPB’s investments has dropped dramatically.

According to a GPB document sent to broker-dealers on Friday, GPB had raised $1.8 billion from wealthy investors who bought the high-risk private placements from registered reps and their broker-dealers, who collectively were paid $167 million in fees and commissions for the transactions. That means brokers and their firms collected 9.3% of the money clients invested into GPB private placements.

Securities industry rules put a cap of 10% on commissions firms, and brokers can collect when selling a product to clients. The 9.3% commissions paid by GPB are not out of line with industry practice. However, they are just on the high side. According to Kelly, investments such as limited partnership private placements typically pay 7% commission to the broker and 2% to the rep’s broker-dealer. In comparison, commissions on mutual funds are typically less than half that amount.

Commissions go up; investments down

As reported, clients were paying steep commissions while the value of what they owned in their investments dropped dramatically. GPB last week estimated the value of its seven funds to be $1.1 billion, or 61% of the initially raised capital. The firm’s focus was on buying auto dealerships and waste management businesses with the intent of generating high, single-digit returns for clients. Two of its largest vehicles, GPB Holdings II and GPB Automotive Portfolio saw values decline 25.6% and 39% respectively. Another poor performer is GPB’s Armada Waste Management. According to GPB, investors bought $163.4 million of the securities, but the current estimated value of the fund is $53.4 million. An investment of $50,000 in Armada Waste Management declined in value 67.4% and is now worth $16,330.


About 60 broker-dealers sold the GPB private placements. Most were smaller firms. However, among the most prominent listed in Securities and Exchange Commission filings were four Advisor Group broker-dealers: Royal Alliance Associates Inc., Sagepoint Financial Inc., FSC Securities Corp., and Woodbury Financial Services Inc.

A spokesperson for GPB Capital says once it completes its audited financials, it will provide additional disclosure to the limited partners regarding the funds’ performance. GBP had previously acknowledged in March 2019 that the FBI was investigating it. Ouch! The bigger question for the 60 broker-dealers involved is likely to come from investors, who will want to know, “How much did I pay you to lose this much of my principal?”

Some return of principal…but no earnings?

Kelly notes that it might be some small consolation to investors that GPB said it returned a total of $272 million to investors through distributions, which act like dividends. That would account for 15% of investors’ capital – as distinguished from an investment return.

He reports that the company has been facing questions from broker-dealers and investors about the value of its private placements, missing a deadline to report financial information about GPB Holdings II and GPB Automotive Portfolio at the end of April. Other setbacks include a discussion by Fidelity’s National Financial Services whether to remove the private placements from its platform.

Historically, GPB has been a sponsor and manager of high-risk, alternative investment private placements sold by brokers who work at independent broker-dealers. According to its website, it has more than 160 companies in its portfolio. Advisers typically receive commissions of 7% for selling the private placements, much higher than for mutual funds.

Does public shaming matter?

In this instance, probably. And it also means more regulatory oversight and demand for compliance. Which translates to more work for compliance professionals like you. That’s where Patrina comes in. For more than 25 years, Patrina has been helping compliance professionals like you keep track of “bad apples,” and stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective, designated third-party services, our comprehensive 8-module compliance solution, and compliant data capture & file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered. Let’s talk.

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