- Om Singh
- Mar 1, 2021
- 8 min read
Updated: 2 days ago
Why did funds create a minimum that is never used?
I believe and allege it is to allow the industry to "triple dip" and charge "firemen" extra by pretending they don't qualify for a less expensive share class. Why do funds that are geared to people making $70,000 annually need a $1,000,000 minimum for a share class which is about 50% of the entire fund? It smells funny.
To put this in perspective, FINRA fined a Wells Fargo broker (Charles Lewis Jr., 11/25) $10,000 and suspended him for a month for submitting $657 in "fictitious" expenses. He submitted fake expenses to make up for legitimate expenses however, the industry demands honorable conduct even in something as non-client related and petty as this. FINRA got him on 2010.
(I source several other penalties at the bottom far less serious than a fake million dollar minimum)
FINRA 2010 : STANDARDS OF COMMERCIAL HONOR AND PRINCIPLES OF TRADE: A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.
Many semi liquid funds have a $1,000,000 minimum for the advisory share class “unless waived”. In this arbitration between a customer and Merrill and Blackstone, the customer asked for a copy of the waiver and no one seems to have it. A waiver that is used at hundreds of RIA’s, B-d's, Hybrids should be able to be produced on the spot. I believe and allege that the entire $1,000,000 minimum is fake and the waiver is fake and it was created to get around Reg BI and charge retail customers extra.
Before Reg BI, it was permitted to charge advisory customers extra by running those charges through a brokerage account. After Reg BI, brokerage accounts were upgraded. The industry had to create a way to continue to pay the dual hatted wealth managers extra to get them to focus on selling these semi liquid funds vs. other products. Reg BI says that minimum account size matters.
Someone/Blackstone (I think) came up with an idea to make a fake $1,000,000 minimum and created the idea of a fake waiver to go along with it. . The entire creation of a fake waiver points to the fact that the industry is aware of the protections that Regulation Best Interest provides customers and is trying to get around those protections.
I am using BCRED as an example because ML/Blackstone had a fake $1,000,000 minimum which was “waived” in this arbitration.
We believe the rationale for the fake $1,000,000 minimum is to allow dual hatted advisors to recommend the “D” share class which are used for advisory accounts just like the “I” share class. However, the ‘D” share class lets a wealth manager charge an extra 25 basis point "servicing fee" annually as well as an upfront placement fee of up to 1.5%.
Since the retail customer doesn’t “qualify” for the “$1,000,000 minimum” of the cheaper I share, the retail customer is only sold the more expensive ‘D” share and the dual hatted wealth manager is able to gouge his unsuspecting fireman a bit extra. Both the extra servicing fee and the upfront placement fee are paid through the dual hatted firms brokerage channel even though the BCRED investment sits in the advisory account.
The firms can’t run extra fees through an advisory account as the fiduciary rule prohibits that. When the regulators come in to audit a dual hatted firm that has placed retail customers in the expensive “D” share class (and not the cheaper I share class) it looks like a clear violation of the time-tested fiduciary rule in advisory accounts.
However, the wealth manager tells the retail customer that he is not eligible for the cheaper I share as the minimum is $1,000,000 and unfortunately “Blackstone” didn’t waive it. The retail customer has no clue about Reg BI or how sneaky his wealth manager is being. The local regulators sign off even though the retail customer is in the expensive "D" share class- too bad, Reg BI requires a minimum and these customers couldn't meet it.
An example will help. Let’s assume a retail customer has $100,000 at a wealth manager and the wealth manager suggests investing $10,000 into BCRED in the advisory account. That wealth manager is supposed to be working as a fiduciary in the advisory account and only receiving a 1% AUM fee.
However, when he suggests the BCRED “D” share, he can “TRIPLE DIP”, he continues to get his 1% AUM fee in the advisory account AND now he ALSO gets an extra 25 bps "servicing fee" paid thru the brokerage channel of the firm because of the “D” share AND he ALSO gets an upfront placement fee of up to 1.5% paid thru the brokerage channel of the firm because of the “D” share.
This fake $1,000,000 minimum and the fake waiver were created to let wealth managers “TRIPLE DIP” at the expense of retail customers.
In our arbitration, the claimant asked for a written explanation of why the $1,000,000 minimum exists and how and in what circumstances it is waived?
If there really is a $1,000,000 minimum for BCRED.... which is waived on occasion...the waiver has to be a thoughtful, arms length document. It should be signed by the top people at Merrill and at Blackstone. There should be specific criteria as to why it is being waived, how long, for who. It needs to be consistent. It certainly has to discuss when and how Blackstone can stop waiving the $1,000,000 minimum.
Blackstone and the other industry funds are claiming that the hundreds of distributors; including small operators (RIA’s, BD's, Hybrids) signed multiple waivers. Has anyone signed a waiver? Can anyone send it to me? These funds including BCRED and BREIT are sold to people who make $70,000 annually. These people need their money. Blackstone and Merrill are claiming that every customer facing firm in the industry must have signed a waiver or they can’t use the I shares for their regular retail clients. This is so unlikely as to be close to impossible.
Incoming cash flows are crucial to provide liquidity. Wealth managers would not invest their clients money into a fund that could curtail demand at any point by raising the minimum from $ 2,500 to $1,000,000. Incoming cash flows would slow to a trickle. Their customers would not be able to get out. This risk would have to be told to every investor in every semi-liquid fund. The customer would ask, under what conditions will the million minimum be waived, and under what conditions will it be reinstated and how will that effect my ability to get out? The normal answer would be, "take a look at the waiver and let's discuss."
That gets to my point. If there was a waiver, everyone would have seen it and commented on it.
There should be hundreds if not thousands of signed waivers and dozens of attorneys who have commented on them. Has anyone seen a waiver or knows an attorney who commented on one?
If anyone has signed a waiver or can contradict above, please let me know. I will retract it.
It sure seems like the people stuck in the "D" shares are being over charged. It certainly seems to violate Reg BI and FINRA rules of selling securities. It certainly isn't nice to the fireman and policemen who are being charged extra.
The funds below have A $1,000,000 minimum and require a waiver. Really these are built to gather money from retail investors and the minimum is usually $2,500. The entire point of these funds is that they can raise money from anyone.
Source AI: AI listed about 20-25 funds.
The people who run the funds below are the finest in the industry.
BREIT
BCRED
Apollo Diversified Credit
AXXES Capital Private Markets Fund (AXEIX)
Starwood REIT
Brookfield Real Asset Securities
JPM REIT
Nuveen Global Cities REIT
Invesco - INREIT
Cohen and Steers CNSREIT
Hines Global Income Trust (HGIT)
Blue Owl Alternative Credit Fund
CION Ares Diversified Credit Fund (CADC)
Blackstone Real Estate Income Trust, Inc. (BREIT) “The minimum investment amount is $1,000,000 for Class I shares, unless waived by the dealer manager.”
Brookfield Real Estate Income Trust Inc. (Brookfield REIT) “The minimum initial investment in shares of our Class I common stock … is $1,000,000, unless waived by the Dealer Manager.”
Nuveen Global Cities REIT, Inc. (GCREIT) “The minimum initial investment for shares of our Class I common stock is $1,000,000, unless waived by the dealer manager.”
Charles Lewis
To put this in perspective, FINRA fined a Wells Fargo broker (Charles Lewis Jr., 11/25) $10,000 and suspended him for a month for submitting $657 in "fictitious" expenses. He submitted fake expenses to make up for legitimate expenses however, the industry demands honorable conduct even in something as non-client related and petty as this. FINRA got him on 2010.
Sandy Galuppo Merrill Lynch Broker suspended one year and a $10,000 fine for expense account violations. He managed 1.4 Billion in assets.
In total, FINRA found that approximately 82 expenses, primarily business-related meals, contained inaccurate information. By failing to ensure that his expense reimbursement requests were accurate, Galuppo caused, among other things, nonreimbursable expenses to be charged against his expense accounts and prevented the Firm from properly ensuring that only expenses consistent with its policies be reimbursed.
FINRA Rule 2010 requires an associated person in the conduct of his or her business to observe high standards of commercial honor and just and equitable principles of trade. When an associated person uses or causes firm funds to be applied in a manner not intended by the firm, he or she makes improper use of those funds in violation of FINRA Rule 2010.
The Bank of America-owned brokerage firm has been aggressive in recent years in retaliating against prominent advisors as a deterrence mechanism and an appeasement to regulators instead of relying on the more common tactic of heightened supervision, said Tom Lewis, a plaintiff’s and employee lawyer with Stevens & Lee in New Jersey. In August it gave walking papers to a 50-year employee for allegedly selling away and unauthorized trading.
“To terminate someone’s effective career over an expense reimbursement seems to be a little drastic,” said Lewis, who emphasized that he does not know Galuppo or the terms of his separation.
John Baldeck- let go for expense account violations.
In another sign of firms’ increasing intolerance with the appearance of expense account improprieties, Morgan Stanley has forced out a 22-year veteran for claiming $273 of meals with his daughters as business expenses, according to regulatory filings.
John J. Baldeck was let go from the firm’s Coeur d’Alene, Idaho, branch over allegations that he requested and received reimbursement for expenses that were “personal in nature,” according to the “permitted to resign” explanation posted in June on his BrokerCheck record.
If you see below, this is a statement from Equitable Advisors. They are using the D share class for this advisory account. The D share class is only about 4% of the entire fund. The i share is about 50% of the entire fund. Why doesn't Equitable use the i-share? Equitable is taking an extra 25 basis points annually from their unsuspecting customers. The money goes to the home office. It is not shared with their reps. Their reps have no idea about this. The reason why they justify it legally is because the i-share has a fake $1,000,000 minimum. The pretend their customers haven't reached the minimum so they use a more expensive share class.
Below is the public page 3 of the Blue Owl OGIC fund. They offer multiple share classes. You can see the D share charges an ongoing service fee of 25 basis points that the i-share doesn't charge. Equitable and Blue Owl run the extra 25 basis points thru the broker-dealer. (It is not relevant for this claim, but the S share charges an optional placement fee of up to 3.5%. That is also against Reg BI)
