Because Andrew Ahrens is no longer licensed by the Financial Industry Regulatory Authority, which has been investigating the local financial adviser for more than a year, the Oct. 6 fine/suspension settlement he reached with FINRA only has teeth if he ever wants to be re-licensed by the authority.
And with the recent trend moving away from a commission-based business model (which requires a FINRA license) in favor a fee-based model, that seems highly unlikely to happen.
ABiz reported on Sept. 15 that Ahrens had been served with a so-called Wells Notice from FINRA in early August, a much-dreaded notification from the regulatory agency formally informing an individual or a firm that it will recommend disciplinary action (this InvestmentNews story followed that report three days later).
At the heart of FINRA’s inquiry were questions about whether Ahrens had prepared approximately 65 consolidated reports for at least four customers that inaccurately reflected the current value and performance of investments, including private placements and non-traded real estate investment trusts, commonly called REITs. According to FINRA’s position on the public disclosure statements included in Ahrens’ BrokerCheck (a free online database from FINRA that contains a broker’s work history, registrations and disciplinary record), the consolidated reports were false and misleading because the values of investments were shown at a significantly higher price than their actual values.
On Oct. 6, in what appears to be a rather quick resolution to the regulatory probe, Ahrens consented to sanctions from FINRA — a $5,000 deferred fine and 30-day suspension — without admitting or denying guilt. It was, for all practical purposes, a “no contest” plea.
And while at first blush it appears Ahrens might be taking a month-long vacation, that’s certainly not the case. “The 30-day suspension is of no consequence to [Ahrens] or his business model, and he will likely never pay the fine,” Brian Carlis, the local financial adviser’s New Jersey-based attorney, tells ABiz. Again, that’s because Ahrens is no longer licensed by FINRA.
In August, the same month he received the Wells Notice, Ahrens broke ties with LPL Financial, the largest organization of independent financial advisers in the country — which he had been with since 1998, and, according to InvestmentNews, was its top adviser. This year Ahrens was named one of the top five advisers in the state by Barron’s, which listed reported assets of $775 million in the ranking.
Ahrens, who founded Ahrens Investment Partners in 1998, recently formed his own independent advisory firm, becoming a Registered Investment Adviser with the Securities and Exchange Commission using Fidelity Investments as custodian. The process for registering with the SEC began about a year ago (around the time FINRA started asking questions) and is part of a larger movement in the industry to switch from commission-based to fee-based models, Carlis explains. "Quite frankly, in a few years most of the industry could be on this fee model. We see more and more of it every day."
Defending the allegations would have likely cost upwards of “20 times the amount of the deferred fine ... and would have consumed [Ahrens’] time for the next six to nine months or so,” stresses Carlis, who says he has worked in the securities field for 25 years, handling more than two dozen Wells Notices sent to clients from FINRA and the SEC during that time period. Carlis says Ahrens was represented by LPL's legal team in the early stages of the investigation and that he was hired only after the Wells Notice was issued (though his firm had already been doing other work for Ahrens) out of Ahrens' desire to seek independent legal advice.
"Having changed his entire business model, it made sense to take the offer," the lawyer adds.
It’s hard to overlook that Ahrens’ former broker-dealer, LPL, has been in hot water for some time — as recently as May of this year FINRA ordered it to pay $11.7 million in fines, citing “broad supervisory failures in a number of key areas,” including sales of non-traditional exchange-traded funds, certain variable annuity contracts, non-traded REITs and other complex products. LPL was also censured and fined for its failure to monitor and report trades and deliver to customers more than 14 million trade confirmations.
And it’s worth noting that Ahrens has cooperated with ABiz’s reporting on this matter, having issued the following statement to the magazine Oct. 14:
I am very pleased to report that a settlement has been reached with FINRA regarding issues raised in a Wells notice received [in August]. There’s no question in my mind that this was the right decision for me and the firm. It saves thousands of dollars in litigation costs, and it brings closure to an event that has generated false rumors about our firm and personal attacks directed at me, my associates and even members of my family.
I was advised to accept the settlement, and I understand why. It was time for this to end. These inquiries can take months possibly over a year to resolve and can be disquieting for clients. Of course, it likely would have diverted my attention away from our mission here at Ahrens. Clearly, this examination also can fuel a rumor mill created by competitors. The issues that FINRA raised were about client reports and statements; the inquiry did not involve mismanagement [of] funds and did not involve any customer complaints. The settlement is not an admission of guilt or innocence rather an agreement by both parties to end negotiations. As a result of the settlement, I have agreed to a deferred fine of $5,000 and a 30-day suspension.
However, it is important for my clients to know that the suspension does not affect my ability to manage investments as I am an SEC Registered Investment Adviser. I am in the office every day taking care of my clients as usual. I have not held a FINRA license for some time and do not need to hold one in order to act as an investment advisor. Many SEC registered advisers make the choice not to hold FINRA licenses. It is business as usual at the Firm. We continue to service existing accounts and open new accounts. In addition we have added two new advisers over the past several weeks.
This investigation started when I was still at LPL Financial and during this time, LPL defended the use of these reports. LPL has been fined on numerous occasions for their lack of supervision with regard to consolidated reporting and the sale of alternative investments. We, as a firm, decided months ago it was best to part ways with LPL voluntarily, primarily because we lacked confidence in their ability to provide us with proper guidance with regard to the always-evolving rules in our industry. We take the rules seriously. Ahrens Investment Partners has established new training and hired financial experts to assure strict compliance with financial industry standards and rules.
I specifically want to express my gratitude and appreciation to my friends and clients for their support over the last two months. It has been a challenging and humbling experience to be under this kind of scrutiny. I am more committed than ever to have a firm known for having a foundation grounded by integrity, ethics, effective communication and honorable values as we continue to advise each client on the very personal issues of investment and wealth management.