Stock broker John Broughton of Michigan has been sued by a customer who alleges Broughton recommended unsuitable investments in a closed-end fund and a business development company. According to the customer, the recommendations did not comport with the customer’s stated risk tolerance and investment objectives.

Mr. Brougton has been involved in a number of other customer disputes, three of which settled. Broughton was most recently registered with the brokerage firm Citizens Securities. He has previously been associated with the firms Cetera Investment Services and LPL Financial.

Suitability / Regulation Best Interest

Stockbrokers have a duty to recommend suitable investments and investment strategies to their clients and otherwise act in their clients best interests. A recommendation is only suitable if it comports with the client’s investment objectives, risk tolerance, investment experience, investment time horizon, liquidity needs, and income needs. Together these considerations form the investor’s unique “investment profile.” The duty to recommend suitable investments cannot be disclaimed through risk disclosures or waivers.

Business Development Companies

BDCs are organized and structured similarly to REITs; however, rather than investing in real estate, BDCs generally invest through subprime loans to “small and developing businesses and financially troubled businesses.” [1] Non-traded BDCs securities have limited exit opportunities, often limited to “periodic share repurchases” by the issuer “at high discounts.”[2] Non-traded BDCs carry a high default risk, id, and are often compared to venture capital or seed capital investments (but without the accredited investor protections). [3] The Wall Street Journal has described them as “High-Fee, Unlisted, Junk-Based Funds.” [4]

[1]https://www.sec.gov/investment/fastanswers/divisionsinvestmentinvcoreg121504htm.html

[2]http://www.finra.org/industry/2013-exam-priorities-letter

[3] SEC Investigation Report, Case No. OIG 496

[4]https://www.wsj.com/articles/these-high-fee-unlisted-junk-based-funds-arent-working-out-1458379803

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