FINANCIAL

FINANCIAL INDUSTRY REGULATORY AUTHORITY

INDUSTRY REGULATORY AUTHORITY
OFFICE OF
OFFICE OF HEARING
HEARING OFFICERS
OFFICERS

DEPARTMENT OF
DEPARTMENT OF ENFORCEMENT,
ENFORCEMENT,
Disciplinary Proceeding
Disciplinary Proceeding
Complainant,
Complainant, No. 2017052867301
No. 2017052867301

v.
v. Hearing Officer—MC
Hearing Officer–MC

MERCER HICKS
MERCER HICKS III
III EXTENDED HEARING PANEL
EXTENDED HEARING PANEL
(CRD No. 245170),
(CRD No. 245170), DECISION
DECISION

Respondent.
Respondent. May 19,
May 19, 2021
2021

Respondent Mercer
Respondent Mercer Hicks
Hicks III
III is barred from
is barred from associating with any
associating with any FINRA
FINRA
member firm
member firm in
in any capacity for
any capacity making unsuitable
for making unsuitable recommendations
recommendations to to five
five
senior customers in
senior customers in violation
violation ofof customer-specific
customer-specific and reasonable-basis
and reasonable-basis
suitability
suitability obligations. He is
obligations. He is ordered to pay
ordered to pay disgorgement
disgorgement of $38,812.60 and
of $38,812.60 and
costs.
costs.

Appearances
Appearances

For the
For the Complainant:
Complainant: Payne
Payne L. Templeton, Esq.,
L. Templeton, Michael Perkins,
Esq., Michael Perkins, Esq., Matthew Minerva,
Esq., Matthew Minerva, Esq.,
Esq.,
and Kay
and Kay Lackey,
Lackey, Esq., Department of
Esq., Department of Enforcement, Financial Industry
Enforcement, Financial Regulatory Authority
Industry Regulatory Authority

For the
For the Respondent:
Respondent: Mercer
Mercer Hicks
Hicks III, pro se
III, pro se

I.
I. Introduction
Introduction

The issue in
The issue in this
this disciplinary
disciplinary proceeding
proceeding is
is whether
whether Respondent
Respondent Mercer
Mercer Hicks
Hicks III violated
III violated
FINRA’s suitability
FINRA's suitability rule
rule when
when he
he recommended high-risk, illiquid
recommended high-risk, illiquid investments to five
investments to five senior
senior
customers.
customers.

FINRA Rule
FINRA Rule 2111
2111 obligates
obligates aa broker
broker to
to evaluate
evaluate the
the suitability
suitability of an investment
of an investment before
before
recommending it.
recommending it. The obligation has
The obligation has two
two prongs.
prongs. One
One isis customer-specific.
customer-specific. It requires the
It requires the broker
broker
to appraise
to appraise the
the investment
investment in in light of each
light of each customer’s
customer's investment profile—including the
investment profile—including the
customer’s age,
customer's age, financial situation, investment
financial situation, investment objectives,
objectives, risk
risk tolerance,
tolerance, and
and needs—to
needs—to decide
decide if
if
there is
there is reason
reason to
to believe
believe the
the investment
investment isis suitable
suitable for that particular
for that particular customer.
customer. ToTo fulfill
fulfill
customer-specific suitability
customer-specific suitability obligations,
obligations, aa broker's
broker’s recommendation
recommendation mustmust align
align with
with the
the

11
customer’s best
customer's best interests and financial
interests and profile. 1 The
financial profile.' The other
other prong,
prong, referred
referred to
to as
as aa reasonable-basis
reasonable-basis
obligation, requires
obligation, requires the
the broker
broker toto conduct
conduct aa reasonably diligent investigation
reasonably diligent investigation ofof the
the investment’s
investment's
features and risks
features and risks to
to ascertain
ascertain whether
whether it
it could be suitable
could be suitable for at least
for at some customers.
least some customers.
Reasonable-basis suitability
Reasonable-basis suitability focuses
focuses on the broker's
on the broker’s understanding
understanding of the recommendation,
of the recommendation, not not
2
on the
on the customer.2
customer.

After carefully
After reviewing the
carefully reviewing the evidence
evidence and
and testimony
testimony presented
presented atat aa hearing
hearing conducted
conducted byby
videoconference, the
videoconference, the Hearing
Hearing Panel
Panel concludes
concludes that
that Hicks
Hicks failed to satisfy
failed to satisfy both
both his
his customer-
customer-
specific and
specific and reasonable-basis suitability obligations
reasonable-basis suitability obligations in
in the
the recommendations
recommendations he he made
made to
to the
the five
five
3
customers.
customers.3

II.
II. Findings of Fact
Findings of Fact

A.
A. The Respondent
The Respondent

Hicks is
Hicks is aa veteran
veteran broker.
broker. He
He began
began his
his career
career in
in 1972,
1972, and
and has
has been
been continuously
continuously
engaged in
engaged in the
the securities
securities business
business for almost 50
for almost years. 4 He
50 years.4 He has
has been
been registered
registered as
as aa General
General
Securities Representative through
Securities Representative through FINRA
FINRA member
member firmfirm Southeast
Southeast Investments, N.C., Inc.,
Investments, N.C., since
Inc., since
April 2014
April 2014 andand therefore
therefore isis subject
subject to
to FINRA's
FINRA’s jurisdiction.
jurisdiction. The
The firm’s
firm's headquarters
headquarters areare in
in
Charlotte, North
Charlotte, North Carolina.
Carolina. Hicks
Hicks works
works out of its
out of its Pinehurst, North Carolina
Pinehurst, North Carolina branch office. 5
branch office.5
Before associating
Before associating with
with Southeast Investments,66 from
Southeast Investments, from April
April 2009
2009 until
until April
April 2014,
2014, hehe was
was
7
registered through
registered through FINRA
FINRA member
member firm Capital Investment
firm Capital Investment Group,
Group, Inc. He associated
Inc.7 He associated with
with aa
8
number of
number of firms prior to
firms prior to joining
joining Capital
Capital Investment.
Investment.8

Hicks resides
Hicks resides in
in Southern Pines, North
Southern Pines, North Carolina,
Carolina, near
near Pinehurst,
Pinehurst, his hometown. 9 In
his hometown.9 In recent
recent
10
years, his
years, his clientele
clientele has
has consisted
consisted primarily
primarily of
of retired
retired senior
senior citizens.10
citizens. ItIt is
is his
his practice
practice to
to use
use the
the
directories of
directories of residents
residents of
of retirement
retirement communities
communities in in and
and around
around Southern Pines to
Southern Pines to identify
identify

1
1Dep’t of
Dep't of Enforcement v. McGee,
Enforcement v. No. 2012034389202,
McGee, No. 2012034389202, 2016
2016 FINRA
FINRA Discip.
Discip. LEXIS
LEXIS 33,
33, at
at *57,
*57, (NAC
(NAC July
July 18,
18,
2016), affd,
2016), Exchange Act
aff'd, Exchange Act Release
Release No.
No. 80314,
80314, 2017
2017 SEC
SEC LEXIS
LEXIS 987
987 (Mar.
(Mar. 27,
27, 2017),
2017), petition
petition for
for review
review denied,
denied,
733 F. App'x
733 F. App’x 571 (2d Cir.
571 (2d Cir. 2018).
2018).
2
2 Id. at *59-61.
Id at *59–61.
3
3The hearing
The was held
hearing was held by
by videoconference
videoconference pursuant
pursuant to
to SR-FINRA-2020-027,
SR-FINRA-2020-027, SR-FINRA-2020-042,
SR-FINRA-2020-042, and and SR-
SR-
FINRA-2021-006, which
FINRA-2021-006, which temporarily
temporarily amended
amended FINRA
FINRA Rules
Rules 9261
9261 and
and 9830
9830 to
to permit
permit conversion
conversion of
of FINRA's
FINRA’s in-
in-
person disciplinary
person disciplinary hearings
hearings to
to videoconference
videoconference hearings
hearings because
because of
of health
health and
and safety
safety concerns
concerns caused
caused by
by the
the
COVID-19 pandemic.
COVID-19 pandemic.
4
4 Hearing Transcript
Hearing (“Tr.”) 856–57;
Transcript ("Tr.") Joint Stipulations
856-57; Joint (“Stip.”) ¶ 1.
Stipulations ("Stip.")
5
Tr.
5 Tr. 56–57; Complainant’s Exhibit
56-57; Complainant's Exhibit ("CX-_")
(“CX-_”) 1,
1, at
at 1.
1.
6
6 Tr, 58;
Tr, CX- 1,
58; CX- 1, at
at 2.
2.
7
Tr.
Tr. 58; CX-1, at
58; CX-1, at 3.
3.
8
8 Tr. 66;
Tr. 66; CX-2.
CX-2.
9
9 Tr. 66;
Tr. 66; CX-1,
CX-1, at
at 1.
1.
10
Stip. ili¶ 3.
1° Stip. 3.

22
potential customers
potential and then
customers and then to
to introduce
introduce himself
himself to
to them
them by
by making
making cold calls. 11 For
cold calls.11 For aa number
number
of years
of years before
before joining
joining Southeast
Southeast Investments, Hicks primarily
Investments, Hicks primarily recommended
recommended that
that his
his clients
clients
12
invest in
invest in liquid securities like
liquid securities like variable annuities, mutual
variable annuities, mutual funds,
funds, and
and tax-free
tax-free bonds.12
bonds.

In 2014, Hicks
In 2014, Hicks changed
changed his his focus
focus and
and began
began toto recommend
recommend to to his
his clients
clients that
that they
they invest
invest
in real
in real estate
estate investment
investment trusts,
trusts, or
or REITs,
REITs, andand aa business
business development
development corporation,
corporation, Business
Business
13
Development Company
Development Company of of America
America ("BDCA").13
(“BDCA”). A A REIT
REIT is
is an
an entity
entity that
that owns
owns or
or manages
manages
14
income-producing real
income-producing real estate.14
estate. BDCA
BDCA is is aa finance company that
finance company that invests
invests in middle-market
in middle-market
companies, not
companies, not real estate. 15 Hicks'
real estate.15 Hicks’ rationale
rationale for the change
for the was his
change was his concern about stock
concern about stock market
market
16
volatility, so
volatility, so he
he decided
decided toto recommend
recommend REITsREITs "thinking
“thinking they
they were
were safer."16 From June
safer.” From 2014
June 2014
through September
through 2017, Hicks
September 2017, Hicks derived more than
derived more than sixty
sixty percent
percent of
of his
his commissions
commissions from
from
17
recommending and
recommending and selling
selling investments
investments in in REITs
REITs andand BDCA.17
BDCA. They They all
all were
were "non-traded,"
“non-traded,” that
that
is, not
is, not bought
bought and
and sold
sold on
on aa national
national exchange.
exchange.

B.
B. The Origin
The Origin of
of the
the Investigation
Investigation

In late September
In late 2017, WM,
September 2017, WM, the the nephew
nephew ofof Hicks
Hicks customer
customer MM,MM, called
called FINRA's
FINRA’s
Senior Helpline. The
Senior Helpline. Helpline is
The Helpline is aa resource
resource FINRA
FINRA provides
provides toto senior
senior citizens
citizens who
who have
have
questions or
questions or problems
problems relating
relating to
to their
their investment
investment accounts
accounts atat FINRA
FINRA member firms. 18 WM,
member finns.18 WM,
handling his
handling his aunt's
aunt’s affairs
affairs through
through aa power
power of
of attorney,
attorney, was
was trying
trying to
to sell
sell the
the shares
shares of
of two
two non-
non-
traded REITs
traded REITs sheshe had
had purchased
purchased through
through Hicks.
Hicks. Then
Then 90 years old,
90 years MM was
old, MM was suffering
suffering from
from
dementia and
dementia and needed
needed toto sell
sell her
her shares
shares toto help
help pay
pay the
the costs
costs of
of her nursing home
her nursing care. 19 WM
home care.19 WM was
was
concerned when
concerned when hehe discovered
discovered that
that Hicks
Hicks had
had put
put more
more than
than half
half of
of MM's
MM’s cash
cash into
into the
the two
two
REITs, the first when she was 87 years old and the second when she was 88.
REITs, the first when she was 87 years old and the second when she was 88. WM contacted theWM contacted the
20
REIT companies
REIT companies but but was
was unable
unable to to liquidate
liquidate the
the two
two investments.20
investments.

When FINRA
When FINRA Principal
Principal Examiner
Examiner Thomas Halstead received
Thomas Halstead received the
the report
report of
of WM's
WM’s
Helpline call,
Helpline call, he
he opened
opened an
an examination
examination into
into Hicks'
Hicks’ recommendations
recommendations and and sales
sales of
of securities
securities to
to
his customers. 21 During
his customers.21 During the
the investigation,
investigation, Halstead
Halstead learned
learned of
of aa second
second call
call to
to the
the Helpline
Helpline by
by

11
Tr. 67;
" Tr. 67; Stip.
Stip. li¶ 2.
2.
12
12 Tr. 82.
Tr. 82.
13
13 Tr. 69-70.
Tr. 69–70.
14
14 Tr. 68-69;
Tr. 68–69; Stip. 4.
Stip. ¶ 4.
15
15 CX-10, at
CX-10, at 1.
1.
16
16 Tr. 226,907.
Tr. 226, 907.
17
17 Tr. 83-4;
Tr. 83–4; CX-117,
CX-117, at 2–3.
at 2-3.
18
18 Tr. 673.
Tr. 673.
19
19 Tr. 672-75;
Tr. 672–75; CX-89.
CX-89.
20
20 Tr. 794–95;
Tr. CX-41.
794-95; CX-41.
21
21 Tr. 675-76.
Tr. 675–76.

33
PL, who
PL, who called
called on
on behalf
behalf of
of her
her 85-year old mother,
85-year old mother, Hicks
Hicks customer
customer NM,
NM, inin April 2018. 22
April 2018.22
Reviewing the
Reviewing the report
report of
of the
the call,
call, Halstead
Halstead became
became concerned
concerned that
that Hicks
Hicks had
had placed
placed 90 percent of
90 percent of
23
NM’s investments
NM's investments into
into non-traded
non-traded REITs.23
REITs.

Halstead interviewed
Halstead interviewed customers,
customers, reviewed
reviewed account
account documents,
documents, and
and conducted
conducted an
an on-the-
on-the-
24
record interview
record interview of
of Hicks.24
Hicks. After
After completing the investigation,
completing the Halstead referred
investigation, Halstead referred the
the findings
findings to
to
25
Enforcement, which then
Enforcement, which then filed the Complaint
filed the Complaint in
in December
December 2019.25
2019.

C.
C. The Complaint
The Complaint and Answer
and Answer

The two-cause Complaint

The two-cause Complaint alleges
alleges that
that Hicks
Hicks violated FINRA Rules
violated FINRA Rules 2111
2111 and
and 2010
2010 when
when
he recommended
he purchases of
recommended purchases of high-risk,
high-risk, illiquid non-traded securities
illiquid non-traded securities offered
offered by
by several
several REITs
REITs
and BDCA
and BDCA to to five senior customers,
five senior ranging in
customers, ranging in age
age from
from 7373 to
to 88 years, without
88 years, without first satisfying
first satisfying
26
the suitability
the suitability rule’s
rule's requirements.
requirements.26 The first
The cause of
first cause of the
the Complaint
Complaint addresses
addresses Hicks'
Hicks’ customer-
customer-
specific suitability
specific suitability obligations.
obligations. ItIt charges that Hicks'
charges that Hicks’ recommendations
recommendations werewere specifically
specifically
unsuitable for
unsuitable for each of the
each of the customers
customers considering their ages,
considering their ages, financial situations, and
financial situations, and investment
investment
profiles. It further alleges that Hicks’ recommendations overly concentrated the
profiles. It further alleges that Hicks' recommendations overly concentrated the investments ofinvestments of
three of
three of the
the customers
customers in in speculative,
speculative, illiquid investments. It
illiquid investments. It describes all five
describes all as having
five as having limited
limited
27
investment knowledge
investment knowledge and and low or moderate
low or moderate risk tolerances.
risk tolerances.27

The second cause

The second cause of the Complaint
of the Complaint addresses
addresses Hicks'
Hicks’ reasonable-basis suitability
reasonable-basis suitability
obligations. It
obligations. alleges that
It alleges that Hicks
Hicks failed
failed to
to conduct
conduct aa reasonably
reasonably diligent
diligent investigation of the
investigation of the
investments he
investments recommended. Consequently,
he recommended. Consequently, he he was
was ignorant
ignorant of
of significant
significant features of the
features of the
securities, including
securities, their numerous
including their inherent risks,
numerous inherent risks, and
and did not have
did not have aa reasonable basis to
reasonable basis to believe
believe
28
the recommendations were suitable for anyone.
the recommendations were suitable for anyone.28
29
In
In his Answer, Hicks
his Answer, Hicks denies
denies the
the allegations
allegations generally.
generally.29 Hicks admits,
Hicks admits, however,
however, that
that he
he
made the
made the recommendations.
recommendations. He He also
also admits
admits that
that he
he recommended
recommended that
that four of the
four of the customers
customers
liquidate investments in
liquidate investments in variable
variable annuities,
annuities, which
which he
he had
had previously
previously recommended
recommended to to them,
them, and
and
reinvest the
reinvest the funds in the
funds in the REITs
REITs and BDCA. 30
and BDCA.3°

22
22 Tr. 681;
Tr. 681; CX-90.
CX-90.
23
23 Tr. 683.
Tr. 683.
24
24 Tr. 677-80.
Tr. 677–80.
25
25 Tr. 676;
Tr. 676; Complaint
Complaint ("Compl.").
(“Compl.”).
26
26 Compl. 75
Compl. ¶¶ 1,
1, 3,
3, 7.
7.
27
27 Compl. iri
Compl. ¶¶ 76, 77.
76, 77.
28
28 Compl. iri
Compl. ¶¶ 82,
82, 83.
83.
29
29 Answer ("Ans.")
Answer (“Ans.”) ¶ 1.
30
Ans. II¶ 111.
30 Ans. 1.

4
4
 D.
D. The Securities
The Securities

From June
From June 2014 through July
2014 through 2017, Hicks
July 2017, Hicks recommended eight non-traded
recommended eight REITs to
non-traded REITs to four
four
of his customers and recommended BDCA to two of them. Consequently, the total
of his customers and recommended BDCA to two of them. Consequently, the total invested by invested by
the five
the five customers
customers came
came to to nearly
nearly $665,000:
$665,000: Customer
Customer TBTB made
made one
one investment
investment in in BDCA
BDCA forfor
$25,000; Customer
$25,000; Customer NCNC made
made anan investment
investment in in BDCA
BDCA andand another
another in
in aa REIT,
REIT, for
for aa total
total of
of
$42,600; Customer
$42,600; Customer MMMM invested
invested aa total
total of
of $50,400
$50,400 in
in two
two REITs;
REITs; Customer
Customer RT RT invested
invested
$87,683 divided
$87,683 divided among
among five different REITs;
five different REITs; and
and Customer
Customer NMNM made
made eight
eight investments
investments in in six
six
31
different REITs
different REITs for
for aa total
total of $459,272.
of $459,272.31

1. The
1. The Non-Traded
Non-Traded REITs
REITs

A REIT
A REIT uses
uses investors'
investors’ capital
capital to
to purchase
purchase aa portfolio
portfolio of
of properties,
properties, such
such as
as office
office
buildings, hotels,
buildings, hotels, and
and apartments.
apartments. Most
Most REITs
REITs invest
invest in
in aa specific
specific type
type of
of real
real estate.
estate. For
For
example, aa REIT
example, REIT may
may invest
invest in
in retail
retail properties,
properties, apartment
apartment communities,
communities, office
office buildings,
buildings, or
or
facilities. 32
healthcare facilities.32
healthcare

There are two

There are two types
types ofof publicly
publicly available
available REITs:
REITs: traded
traded and
and non-traded.
non-traded. Traded
Traded REITs
REITs
are bought
are bought and
and sold
sold on
on aa national
national securities
securities exchange.
exchange. Non-traded
Non-traded REITs
REITs are
are not.
not. All
All of
of the
the
33
REITs Hicks
REITs Hicks recommended
recommended were were non-traded.33
non-traded. Investors
Investors inin exchange-traded
exchange-traded REITs
REITs can can buy
buy or
or
sell shares
sell shares relatively
relatively easily, but non-traded
easily, but non-traded REITs
REITs are illiquid. 34 An
are illiquid.34 An investment
investment in in aa non-traded
non-traded
REIT generally
REIT generally does
does not
not become
become liquid
liquid until the REIT
until the REIT liquidates assets or
liquidates assets or lists its shares
lists its shares on on an
an
exchange, and
exchange, and these
these events,
events, if they happen,
if they happen, may
may not occur for
not occur more than
for more than 10
10 years
years after
after an
an
35
investor purchases shares. A non-traded REIT may allow investors to redeem
investor purchases shares.35 A non-traded REIT may allow investors to redeem their shares but their shares but
redemption opportunities
redemption opportunities areare limited.
limited. The REIT may
The REIT may require
require that
that shares
shares be
be redeemed
redeemed at at aa
discount, so
discount, an investor
so an investor who
who redeems
redeems shares
shares does
does not
not recover the amount
recover the amount invested.
invested. A A REIT
REIT hashas
the discretion
the to terminate
discretion to terminate aa share-redemption
share-redemption program
program without
without notice. Non-traded REITs
notice. Non-traded REITs often
often
charge high
charge high fees
fees and
and may
may make
make distributions
distributions to
to investors
investors from their offering
from their proceeds—the
offering proceeds—the
investors’ money—reducing
investors' money—reducing the the value
value of
of shares
shares and
and the
the cash available to
cash available to the
the REIT
REIT to to purchase
purchase
36
assets..36
assets

The prospectuses of
The prospectuses of the
the non-traded
non-traded REITs
REITs Hicks
Hicks recommended
recommended describe the inherent
describe the inherent
risks of
risks of investing
investing in
in unequivocal terms. Typically,
unequivocal terms. they warn
Typically, they warn that
that investing
investing in them "involves
in them “involves aa
high degree
high of risk,"
degree of risk,” one
one of
of which
which is “a complete
is "a complete loss” of investments,
loss" of investments, and
and refer
refer the
the reader
reader to
to aa
multi-page section
multi-page section titled
titled "Risk
“Risk Factors."
Factors.” The prospectuses also
The prospectuses also contain
contain suitability standards
suitability standards

31
31 CX-115.
CX-115.
32
32 CX-84, at
CX-84, at 1.
1.
33
33 CX-81, at
CX-81, at 1.
1.
34
34 Tr. 93-94.
Tr. 93–94.
35
35 CX-84, at
CX-84, at 1.
1.
36
36 Tr. 97-100;
Tr. 97–100; CX-84,
CX-84, at
at 1-2.
1–2.

55
warning that
warning that the
the REITs
REITs are
are suitable
suitable only
only for
for persons
persons who
who "will
“will not
not need
need immediate
immediate liquidity"
liquidity”
37
and repeat
and repeat that
that investing
investing "involves
“involves aa high
high degree
degree of
of risk.”
risk." 37

2. Business Development
2. Business Development Company
Company of America
of America

Business development
Business companies are
development companies are entities
entities that
that invest
invest in the debt
in the and equity
debt and equity of small
of small
and medium-sized
and medium-sized enterprises
enterprises unable to acquire
unable to acquire capital
capital easily.
easily. Non-traded
Non-traded business
business development
development
companies are
companies are not publicly traded
not publicly traded and,
and, like
like non-traded REITs, are
non-traded REITs, are illiquid and risky
illiquid and risky
investments. 38
investments.38
39
BDCA is
BDCA is aa non-traded
non-traded business
business development
development company.
company.39 As stated
As stated on
on the
the first
first page
page of
of its
its
prospectus, an
prospectus, an investment
investment in in BDCA
BDCA is is speculative
speculative with
with "a
“a high
high degree
degree ofof risk,
risk, including
including the
the risk
risk
of aa complete
of complete loss
loss ofof investment."
investment.” TheThe prospectus
prospectus also
also warns
warns that
that investors
investors "should
“should notnot expect
expect toto
sell” their
sell" their shares,
shares, andand if
if they
they are
are able
able to
to do
do so,
so, they
they will
will "likely
“likely receive
receive less” than they
less" than they paid
paid for
for
them. It
them. states that
It states that the
the company
company hashas aa redemption
redemption program
program but
but explains that it
explains that is limited,
it is limited, and
and
40
investors may
investors may notnot bebe able
able to
to access
access the
the funds invested "for
funds invested “for an
an indefinite
indefinite period
period of time.”
of time."40

The BDCA prospectus

The BDCA prospectus contains
contains aa section
section describing
describing thethe company's
company’s suitability
suitability standards.
standards.
It makes clear
It makes clear that
that BDCA
BDCA is is aa high-risk
high-risk investment.
investment. It states that
It states that BDCA's
BDCA’s stock
stock is
is "suitable
“suitable only
only
as aa long-term
as investment for
long-term investment persons of
for persons of adequate
adequate financial means who
financial means who have
have no
no need for
need for
41
liquidity
liquidity in this investment.”
in this investment."41 It It specifies
specifies that
that BDCA
BDCA "will
“will not
not sell
sell shares"
shares” to
to residents
residents of
of
certain states
certain states "unless
“unless they
they meet
meet special
special suitability
suitability standards."
standards.” ForFor North
North Carolina
Carolina residents to
residents to
qualify, they
qualify, they must
must have,
have, at
at aa minimum,
minimum, bothboth liquid
liquid assets
assets ofof $85,000
$85,000 and
and gross income of
gross income of
$85,000, or
$85,000, or aa minimum
minimum liquid
liquid netnet worth
worth ofof $300,000
$300,000 (“North Carolina suitability
("North Carolina suitability
requirements”).
requirements"). 42

As the
As the parties
parties stipulate,
stipulate, both
both BDCA
BDCA andand the
the non-traded
non-traded REITs
REITs Hicks
Hicks recommended
recommended are
are
43
illiquid and
illiquid and expose
expose investors
investors to
to aa high
high level of risk.43
level of risk.

E.
E. Hicks’ Failure
Hicks' to Understand
Failure to Non-Traded REITs
Understand Non-Traded REITs and BDCA
and BDCA

According to
According to Hicks,
Hicks, he
he was
was first
first "introduced"
“introduced” or
or "exposed"
“exposed” to
to non-traded
non-traded REITs
REITs and
and
BDCA by
BDCA by Capital
Capital Investment in 2013.
Investment in 2013. Capital
Capital Investment directed Hicks
Investment directed Hicks to
to "learn
“learn this
this business"
business”
from
from aa company,
company, American
American Realty
Realty Capital
Capital ("ARC").
(“ARC”). Hicks
Hicks had never recommended
had never recommended REITs
REITs

37
37 CX-5, at
E.g., CX-5,
E.g., at 1,
1, 3,
3, 37-74.
37–74.
38
38 Stip. illi¶ 5.
Stip. 5.
39
39 Stip. illi¶ 8.
Stip. 8.
40
40 CX-10, at
CX-10, at 1.
1.
41
CX-10,
41 CX- 10, at 3.
at 3.
42
CX-10,
42 CX- 10, at 4-5.
at 4–5.
43
43 Stip. illi¶ 5.
Stip. 5.

6
6
before. 44 He
before." He testified
testified that
that Capital
Capital Investment “sold” him
Investment "sold" him "on
“on the
the entire concept” of
entire concept" of
recommending non-traded
recommending non-traded REITs.
REITs. The firm sent
The firm sent him
him toto New
New York
York andand to
to Myrtle
Myrtle Beach
Beach to
to attend
attend
45
“sales conferences,
"sales conferences, due due diligence
diligence conferences,
conferences, etcetera."45
etcetera.” He He acquired
acquired most
most of
of his
his
understanding of non-traded REITs and BDCA from
understanding of non-traded REITs and BDCA from ARC's sales ARC’s sales and
and marketing
marketing personnel, who
personnel, who
46
emphasized their
emphasized their potential
potential benefits,
benefits, not
not their
their risks.46
risks. As As aa result,
result, he
he "was
“was led to believe
led to believe that
that these
these
47
were stable
were stable .. .. .. income oriented investments”
income oriented investments"47 andand assumed
assumed that
that they
they would
would provide
provide his
his
48
customers an
customers an annual
annual income
income ofof six percent of
six percent of their
their investment.
investment.48

Hicks’ understanding
Hicks' understanding was
was seriously
seriously flawed. When he
flawed. When he recommended
recommended BDCA,
BDCA, for
for example,
example,
he testified
he testified that
that he
he "did
“did not
not understand
understand the
the risks,
risks, that's
that’s for
for sure."
sure.” He
He did
did not
not know
know that
that BDCA
BDCA
49
was aa non-traded
was business development
non-traded business development corporation.
corporation.49 HeHe mistakenly
mistakenly thought
thought BDCA
BDCA waswas aa non-
non-
50
traded REIT,
traded REIT, and
and made
made his recommendations of
his recommendations of BDCA
BDCA with
with that
that misunderstanding.5°
misunderstanding. Hicks
Hicks
considered non-traded
considered REITs to
non-traded REITs to be
be conservative
conservative or
or moderate investments. 51
moderate investments.51

Hicks testified
Hicks testified that
that the
the reason
reason he
he believed
believed that
that BDCA
BDCA was was aa REIT
REIT was
was that
that ARC's
ARC’s owner
owner
and wholesalers
and wholesalers "introduced"
“introduced” BDCABDCA to to him,
him, and
and he
he thought
thought ARC
ARC offered
offered "nothing
“nothing but
but real
real
estate investment
estate investment trusts."
trusts.” Thus, he "did
Thus, he “did not
not catch
catch the
the fact that BDCA
fact that BDCA was was not
not aa real
real estate
estate
investment trust"
investment trust” even
even though
though the
the BDCA
BDCA prospectus
prospectus makes
makes itit clear
clear that
that it
it is
is not
not aa REIT
REIT but,
but,
rather, "a
rather, “a specialty
specialty finance
finance company
company formed
formed toto make
make debt
debt and
and equity
equity investments
investments in in middle
middle
52 53
market companies."52
market companies.” He He thought
thought BDCA
BDCA invested
invested inin "real
“real estate
estate of
of all
all types,"53
types,” including
including
“income producing
"income producing properties,
properties, apartments,
apartments, businesses,
businesses, offices,
offices, what
what have you.” 54
have you."54

Hicks testified
Hicks testified that
that ARC's
ARC’s representatives
representatives assured
assured him
him that
that the
the shares
shares of
of BDCA
BDCA andand the
the
REITs would
REITs would bebe liquid in three
liquid in three to to five
five years.
years. He
He did
did not
not know
know that
that the
the prospectuses
prospectuses provided
provided
55
very different information about the prospects of near-term liquidity.55 For example, aa standard
very different information about the prospects of near-term liquidity. For example, standard
disclosure in
disclosure in the
the ARC-sponsored
ARC-sponsored REIT REIT prospectuses
prospectuses states
states that
that there
there is
is "no
“no guarantee
guarantee that
that
distributions will
distributions will be
be paid
paid .. .. .. there
there is
is no
no guarantee
guarantee of
of any
any return
return on
on your
your investment."
investment.” Another
Another

44
" Tr. 50–51,
Tr. 95.
50-51,95.
45
48 Tr. 156.
Tr. 156.
46
46 Tr. 141-43.
Tr. 141–43.
47
47 Tr. 51.
Tr. 51.
48
48 Tr. 209,261,293-94.
Tr. 209, 261, 293–94.
49
49 Tr. 208-09.
Tr. 208–09.
50
50
Tr. 201-03.
Tr. 201–03.
51
Tr.
51 Tr. 161.
161.
52
52 Tr. 203-04.
Tr. 203–04.
53
83 Tr. 206-07.
Tr. 206–07.
54
84 Tr. 208.
Tr. 208.
55
88 Tr. 106.
Tr. 106.

7
7
disclosure states
disclosure states "No
“No public
public market
market exists
exists for
for our
our shares
shares of
of common
common stock,
stock, nor
nor may
may aa public
public
56
market ever
market ever exist and our
exist and our shares
shares are,
are, and
and may
may continue
continue to
to be,
be, illiquid.”
illiquid."56

Hicks testified
Hicks testified that
that he
he simply
simply "trusted"
“trusted” that
that Capital
Capital Investment’s compliance department
Investment's compliance department
conducted due
conducted due diligence
diligence reviews
reviews ofof the
the REITs
REITs when
when they they were
were made
made public.
public. Yet
Yet he
he conceded
conceded
that some
that some ofof the
the offerings
offerings he
he recommended
recommended were were not
not issued
issued until
until several
several years
years after
after he
he left
left
57
Capital Investment.
Capital Aside from
Investment.57 Aside from reading
reading aa few
few pages
pages of of aa REIT's
REIT’s prospectus,
prospectus, he
he testified,
testified, he
he left
left
it to
it to his
his firm's
firm’s compliance department to
compliance department to review the prospectuses
review the prospectuses and and check into the
check into the background
background
of the
of REITs. 58 Hicks
the REITs.58 Hicks conceded
conceded that
that he
he did
did not
not know
know what,
what, if any, due
if any, due diligence either Capital
diligence either Capital
Investment
Investment or or Southeast
Southeast Investments performed to
Investments performed to ascertain
ascertain the
the suitability
suitability of
of the
the non-traded
non-traded
59
REITs and
REITs and BDCA
BDCA investments
investments hehe recommended.59
recommended.

F.
F. The Customers
The Customers and
and Hicks’ Recommendations
Hicks' Recommendations

1. Customer
1. Customer TB
TB

Customer TB,
Customer born in
TB, born in 1933,
1933, is
is aa retired
retired minister
minister living alone in
living alone in Whispering
Whispering Pines,
Pines, North
North
60
Carolina. TB made
Carolina. 60 TB made two
two investments
investments recommended
recommended by by Hicks.
Hicks. The
The first was aa variable
first was variable annuity
annuity
61 62
in 2010.61
in 2010. TheThe second
second was
was aa purchase
purchase of
of BDCA
BDCA shares in December
shares in December 2014.62
2014.

TB and her
TB and her now-deceased
now-deceased husband
husband first
first met
met Hicks
Hicks ten
ten to
to twelve
twelve years
years ago
ago when
when he
he came
came
63
to their
to their house
house and
and introduced
introduced himself.
himself.63 In October
In October 2010,
2010, Hicks,
Hicks, then
then associated
associated with
with Capital
Capital
Investment, recommended that
Investment, recommended that TB
TB purchase
purchase aa variable
variable annuity
annuity Hicks
Hicks favored,
favored, offered
offered by
by
Jackson National Life
Jackson National Life Insurance Company ("Jackson
Insurance Company (“Jackson Life”), with aa six
Life"), with six percent
percent guaranteed
guaranteed
64
income benefit.
income benefit. 64

In 2014, Hicks,
In 2014, Hicks, by
by then
then associated
associated with
with Southeast
Southeast Investments, recommended that
Investments, recommended that TB
TB
65
invest in
invest in BDCA.65
BDCA. TB TB made
made two
two withdrawals
withdrawals totaling
totaling $26,114
$26,114 from
from her
her variable
variable annuity
annuity
66 67
account and
account66 and in
in December
December 2014
2014 purchased
purchased shares
shares of
of BDCA
BDCA for
for $25,000.67
$25,000.

56
56 CX-8, at
CX-8, at 1.
1.
57
57 Tr. 156-57.
Tr. 156–57.
58
58 Tr. 142-43.
Tr. 142–43.
59
59 Tr. 147-48.
Tr. 147–48.
60
69 Tr. 472-73.
Tr. 472–73.
61
61 CX-34.
CX-34.
62
' Stip illi¶ 8.
Stip 8.
63
63 Tr. 476.
Tr. 476.
64
64 Tr. 185-86.
Tr. 185–86.
65
65 Stip. ¶ 8;
Stip. 8; CX-14a.,
CX-14a., at
at 1.
1.
66
66 Tr. 492-93;
Tr. 492–93; CX-34,
CX-34, at
at 80, 87.
80, 87.
67
67 Tr. 188-89;
Tr. 188–89; CX-14a,
CX-14a, at
at 10.
10.

8
8
 On TB's
On TB’s new
new account
account form
form for the investment,
for the Hicks checked
investment, Hicks checked the
the boxes
boxes describing
describing her
her
investment profile.
investment profile. He
He marked
marked preservation
preservation of of capital
capital as
as her
her objective
objective and
and indicated
indicated that
that she
she had
had
aa conservative
conservative risk tolerance, the
risk tolerance, the second
second lowest of the
lowest of the risk
risk tolerance
tolerance ratings
ratings on
on the
the form. Hicks
form. Hicks
indicated that her investment knowledge was “low.” He also checked a box stating
indicated that her investment knowledge was "low." He also checked a box stating that her "time that her “time
68
horizon” for
horizon" for the
the investment
investment was was 10
10 years
years oror more.
more.68 When
When asked
asked why
why he
he chose
chose that
that span
span of
of time
time
for
for TB, who was
TB, who was byby then
then 81 years old,
81 years Hicks replied
old, Hicks that "she
replied that “she was
was in
in good health” and
good health" and hehe
69
assumed "she
assumed “she would
would live
live aa long life.”
long life."69

On the
On the form,
form, Hicks
Hicks estimated
estimated TB’s annual income
TB's annual income toto be
be between
between $50,000 and $74,999,
$50,000 and $74,999,
and her
and her liquid assets in
liquid assets in the
the range
range of
of $150,000
$150,000 toto $249,999.
$249,999. Hicks
Hicks checked
checked the
the box
box estimating
estimating her
her
70
net worth
net worth at at $500,000
$500,000 but
but wrote
wrote in
in $650,000.
$650,000.7° InIn her
her testimony,
testimony, TB confirmed that
TB confirmed that Hicks'
Hicks’
entries on
entries on the
the form
form accurately
accurately reflected
reflected her
her investment
investment objective,
objective, annual
annual income,
income, and
and liquid
liquid
71
assets. 71
assets.

TB understood, from
TB understood, from incorrect
incorrect information
information Hicks
Hicks provided,
provided, that
that BDCA
BDCA was
was involved in
involved in
“[s]ome kind
"[s]ome kind of
of real
real estate"
estate” investments
investments she
she surmised
surmised could
could have
have been
been "buildings
“buildings of
of some
some
sort.” 72 TB
sort."72 TB confirmed,
confirmed, asas Hicks
Hicks admitted,
admitted, that
that he
he did
did not
not explain
explain the
the risks
risks of
of investing
investing in
in BDCA,
BDCA,
73
and did
and did not
not warn
warn her
her that
that she
she could
could lose
lose her
her entire
entire investment.73
investment.

TB signed the
TB signed the BDCA
BDCA subscription
subscription form
form under
under aa statement
statement representing
representing that
that she
she met
met the
the
74
North Carolina
North Carolina suitability
suitability requirements.74
requirements. She She also
also initialed
initialed six
six separate
separate acknowledgments,
acknowledgments,
including, again,
including, again, that
that (i)
(i) she met her
she met her state's
state’s suitability
suitability thresholds
thresholds for investing in
for investing in BDCA;
BDCA; (ii)(ii)
investors may
investors may not be able
not be able to
to access
access their
their money
money until
until BDCA
BDCA completed
completed aa liquidity
liquidity event, which
event, which
might not
might occur; (iii)
not occur; (iii) she
she did not expect
did not to be
expect to be able
able to
to sell
sell her shares; and
her shares; and (iv)
(iv) if she did,
if she she
did, she
75
would likely receive less than she paid for them. TB testified that she did not
would likely receive less than she paid for them.' TB testified that she did not know what she know what she
was acknowledging
was acknowledging at at the
the time.
time. She testified that
She testified that she
she wanted
wanted "all
“all [her]
[her] money
money toto be
be liquid.”
liquid." TB
TB
76
testified she
testified she "can't
“can’t believe"
believe” she
she would
would "sign
“sign anything
anything that
that dumb."76
dumb.”

Sometime
Sometime in late 2020
in late 2020 or
or early
early 2021,
2021, TB wrote Hicks
TB wrote Hicks aa letter
letter asking
asking him
him to
to liquidate
liquidate her
her
shares so
shares so that
that she
she could
could reinvest
reinvest her
her funds.
funds. Hicks
Hicks went
went to
to her
her home
home and
and told
told her
her he
he could
could not
not do
do
it, because
it, because BDCA
BDCA shares
shares were
were not
not like
like stocks
stocks that
that can
can be
be traded.
traded. Hicks
Hicks said
said he
he would
would try
try to
to get
get

68
68 Tr. 193-94;
Tr. 193–94; CX-14a,
CX-14a, at
at 3.
3.
69
69 Tr. 195.
Tr. 195.
70
7° Tr. 196-99;
Tr. 196–99; CX-14a,
CX-14a, at
at 4.
4.
71 Tr. 484–89.
71
Tr. 484-89.
72
72 Tr. 483.
Tr. 483.
73
73 Tr. 495.
Tr. 495.
74
74 Tr. 489-91;
Tr. 489–91; CX-14a,
CX-14a, at
at 6.
6.
75
78 CX-14a, at
CX-14a, at 6-8.
6–8.
76
76 Tr. 491.
Tr. 491.

99
her money
her money out
out as
as soon
soon as
as he
he could.
could. At
At the
the time
time of
of the
the hearing
hearing she
she was
was still
still unable
unable to
to liquidate her
liquidate her
77
shares.
shares.77

2. Customer NC
2. Customer NC

Customer NC,
Customer NC, born
born in
in 1934,
1934, is
is aa widow,
widow, retired
retired school
school nurse
nurse and
and teacher,
teacher, residing
residing in
in
Pinehurst, North
Pinehurst, North Carolina.
Carolina. Described
Described by
by her
her daughter,
daughter, HH,
HH, as
as having
having severely
severely impaired
impaired hearing
hearing
78
and high
and high blood
blood pressure,
pressure, NC
NC did
did not
not testify
testify at
at the
the hearing,
hearing, but
but HH
HH did. In 2019,
did. 78 In 2019, HH
HH obtained
obtained aa
79
power of
power of attorney
attorney for NC and
for NC and has
has since
since handled
handled NC's
NC’s finances.
finances.79

NC has
NC has been
been Hicks'
Hicks’ customer
customer forfor more
more than
than 20 years. 80 She
20 years.8° She met
met Hicks
Hicks in the 1990s
in the 1990s when
when
81
he was
he was aa financial advisor to
financial advisor to her
her now-deceased
now-deceased husband. Over the
husband.81 Over the years,
years, Hicks
Hicks recommended,
recommended,
and NC
and NC made,
made, three
three investments:
investments: (i)
(i) aa Jackson
Jackson Life variable annuity
Life variable annuity with
with aa guaranteed
guaranteed income
income
benefit; (ii)
benefit; (ii) BDCA;
BDCA; andand (iii) an ARC-sponsored
(iii) an ARC-sponsored non-traded REIT, Realty
non-traded REIT, Realty Finance
Finance Trust,
Trust, Inc.
Inc.
82
(“ARC Finance").
("ARC Finance”). 82

NC was
NC was satisfied
satisfied with
with her annuity. 83 Nonetheless,
her annuity.83 Nonetheless, in in October
October or or November
November 2014,
2014, when
when
she was 80 years old, Hicks recommended withdrawing $27,600 from
she was 80 years old, Hicks recommended withdrawing $27,600 from her annuity account to her annuity account to
84
purchase non-traded
purchase non-traded shares
shares of
of BDCA,
BDCA, and and she
she did
did so.84
so. At At Hicks'
Hicks’ request, on October
request, on October 30,30, 2014,
2014,
NC wrote
NC wrote aa note
note "To
“To whom
whom it may concern”
it may stating that
concern" stating that she
she had directed Hicks
had directed Hicks "to
“to sell
sell aa portion
portion
of my
of my annuity
annuity and
and invest the money
invest the money intointo aa real estate trust."
real estate trust.” The note says
The note NC was
says NC was "tired
“tired ofof
stock market
stock market risks"
risks” and
and that
that she
she knew
knew she
she would
would pay pay "a“a penalty
penalty of
of approximately
approximately $800"
$800” forfor
taking money
taking money out
out of
of the
the annuity.
annuity. She wrote "This
She wrote “This is my decision
is my decision and
and mine alone.” 85 NC
mine alone."85 NC told
told
FINRA Principal
FINRA Principal Examiner Halstead in
Examiner Halstead in an
an interview
interview thatthat Hicks
Hicks told
told her
her what
what to
to write
write in
in the
the
86
note. Hicks admitted asking NC to write the note and providing her with the
note. 86 Hicks admitted asking NC to write the note and providing her with the words to describe words to describe
her investment,
her investment, incorrectly,
incorrectly, asas aa real
real estate trust. 87 But
estate trust.87 But when
when asked
asked if “This is
if "This my decision
is my decision andand
mine alone"
mine alone” were
were NC's
NC’s words
words or or his,
his, he
he prevaricated.
prevaricated. First,
First, he
he said
said hehe did not "precisely
did not “precisely recall."
recall.”
Then
Then hehe said, “They were
said, "They were not
not my
my words,"
words,” while
while admitting
admitting that
that other
other customers wrote similar
customers wrote similar

77
77 Tr. 496-499.
Tr. 496–499.
78
78 Tr. 810-11;
Tr. 810–11; Stip. ¶ 9.
Stip. ¶ 9.
79
79 Tr. 813.
Tr. 813.
80
80 Stip. iiii¶ 9.
Stip. 9.
81
81 Tr. 809,
Tr. 809, 812.
812.
82
82 Tr. 220-21,
Tr. 220–21, 813-16,
813–16, 822; CX-15a, at
822; CX-15a, at 1.
1.
83
83 Tr. 703.
Tr. 703.
84
84 Tr. 220-21;
Tr. 220–21; Stip. ¶ 10.
Stip. ¶ 10.
85
85
Tr. 222-23;
Tr. 222–23; CX-15a,
CX-15a, at
at 3.
3.
86
86 Tr. 708.
Tr. 708.
87
87 Tr. 223-24.
Tr. 223–24.

10
10
notes when
notes when he
he recommended
recommended they
they withdraw
withdraw funds from their
funds from their variable annuities to
variable annuities to invest
invest in
in
88
BDCA or
BDCA or non-traded
non-traded REITs.88
REITs.

Hicks filled
Hicks out the
filled out the suitability
suitability section
section in
in the
the paperwork
paperwork associated
associated withwith NC's
NC’s BDCA
BDCA
89
purchase. 89
purchase. He characterized
He NC’s investment
characterized NC's investment objective
objective asas income,
income, her risk tolerance
her risk tolerance as
as
moderate, and
moderate, and her
her investment purpose as
investment purpose as "save
“save for
for retirement,"
retirement,” although
although sheshe was
was already
already retired.
retired.
He estimated
He NC’s income
estimated NC's income toto be
be between
between $25,000
$25,000 and
and $50,000,
$50,000, her
her net
net worth
worth more
more than
than
90
$500,000, and
$500,000, and her
her liquid
liquid assets
assets between
between $100,000
$100,000 and
and $500,000.90
$500,000. However,
However, whenwhen Halstead
Halstead
interviewed her,
interviewed her, NC
NC said
said her
her risk
risk tolerance
tolerance was conservative 91 and
was conservative91 and that
that Hicks
Hicks had
had overestimated
overestimated
her net
her net and
and liquid assets. 92 NC’s
liquid assets.92 NC's daughter, HH, confirmed
daughter, HH, this, testifying
confirmed this, testifying that
that NC's
NC’s net worth
net worth
was less,
was not more,
less, not more, than
than $500,000,
$500,000, and
and that
that her
her liquid assets were
liquid assets were in the range
in the range ofof $50,000 to
$50,000 to
93
$100,000, not
$100,000, not $100,000
$100,000 to to $500,000.
$500,000.93

In June 2015,
In June 2015, when
when NCNC was
was 81 years old,
81 years old, Hicks
Hicks made
made hishis third
third recommendation
recommendation and and she
she
94
invested $15,000
invested $15,000 in
in the
the non-traded
non-traded REIT
REIT ARC
ARC Finance.94
Finance. In In the
the account
account application
application for
for NC's
NC’s
investment, Hicks
investment, Hicks stated
stated her
her risk
risk tolerance
tolerance was
was moderate
moderate and
and her
her investment
investment horizon
horizon was
was 10
10
years or
years or more,
more, despite
despite her
her age.
age. Hicks
Hicks estimated
estimated NC's
NC’s liquid net worth
liquid net worth at $225,000. 95 Considering
at $225,000.95 Considering
the evidence
the evidence as
as well
well as
as both
both Hicks'
Hicks’ and
and HH's
HH’s testimony,
testimony, we
we find that Hicks
find that Hicks inflated
inflated NC's
NC’s risk
risk
tolerance, net
tolerance, net worth,
worth, and
and liquid
liquid assets,
assets, in
in the
the account
account applications
applications he he prepared
prepared for
for these
these two
two
investments.
investments.

Hicks told
Hicks told NC
NC that
that ARC
ARC Finance
Finance invested
invested inin income-producing
income-producing real
real estate
estate and
and would
would pay
pay
96
her aa six
her six percent
percent annual
annual return
return on
on her
her investment.
investment. 96 HeHe did
did not
not inform
inform her
her of
of the
the risks
risks listed
listed in
in
the prospectus,
the prospectus, including
including that
that the
the company
company hadhad no
no established
established sources
sources of
of financing. He did
financing. He did not
not
inform NC that, according to the prospectus, ARC Finance was an emerging-growth
inform NC that, according to the prospectus, ARC Finance was an emerging-growth company, company,
investing in
investing in it involved "a
it involved “a high degree of
high degree of risk,” and investors
risk," and investors should
should purchase
purchase shares
shares only
only if
if they
they
could afford
could afford aa complete loss. He
complete loss. He did
did not inform NC
not inform NC that
that ARC
ARC Finance
Finance could pay investors
could pay investors
distributions from
distributions from any
any source
source "including
“including unlimited amounts from
unlimited amounts the offering
from the proceeds.” 97
offering proceeds."97

Even though NC's

Even though NC’s initials
initials appear
appear in
in aa Southeast disclosure letter
Southeast disclosure letter acknowledging
acknowledging that
that she
she
understood ARC
understood ARC Finance
Finance involved
involved aa high
high degree of risk
degree of and possible
risk and possible loss
loss of her investment,
of her she
investment, she

88
88 Tr. 227-28.
Tr. 227–28.
89
89 Tr. 241;
Tr. 241; CX-15a
CX-15a at
at 4,8-9.
4, 8–9.
90
98 CX-15a, at
CX-15a, at 8.
8.
91
91 Tr. 706;
Tr. CX-86, at
706; CX-86, at 9.
9.
92
92 Tr. 704.
Tr. 704.
93
93 Tr. 818.
Tr. 818.
94
94 Tr. 221;
Tr. 221; Stip.
Stip. ¶
¶ 11;
11; CX-16,
CX-16, at
at 1.
1.
95
95 CX-16, at
CX-16, at 3,5.
3, 5.
96
96 Tr. 258.
Tr. 258.
97
92 Tr. 262-64;
Tr. 262–64; CX-12,
CX-12, at
at 1.
1.

11
11
told Halstead
told Halstead that
that she
she did
did not
not understand
understand that
that at
at the time. 98 She
the time.98 She said
said she
she trusted
trusted Hicks,
Hicks, and
and
99
signed documents
signed documents where
where he
he told
told her
her to.99
to.

The ARC Finance

The ARC Finance prospectus'
prospectus’ minimum
minimum suitability
suitability thresholds
thresholds include
include requirements
requirements that
that
investors have
investors have aa net
net worth
worth of
of at
at least $250,000 or
least $250,000 or gross annual income
gross annual income ofof $70,000 plus aa net
$70,000 plus net
100
worth of
worth of at
at least
least $70,000.
$70,000.1°° NC, as
NC, as Hicks
Hicks conceded,
conceded, did
did not
not meet
meet these
these minimum
minimum suitability
suitability
101
requirements. In
requirements.1°1 In addition,
addition, NC
NC did
did not
not meet
meet the
the North
North Carolina
Carolina suitability
suitability requirements
requirements forfor
102
investing in
investing in BDCA.1°2
BDCA. Hicks Hicks did not tell
did not tell her
her this,
this, and
and did
did not
not warn
warn her
her of
of the
the risks
risks of
of investing
investing inin
BDCA. 103
BDCA.1°3

3. Customer
3. Customer MM
MM

Customer MM,
Customer MM, born
born inin 1927,
1927, is
is aa retired
retired civil
civil servant
servant living
living in
in aa nursing
nursing home
home inin
Pinehurst, North
Pinehurst, North Carolina.
Carolina. Her
Her nephew,
nephew, WM,
WM, obtained
obtained aa power
power of of attorney
attorney to
to handle
handle her
her affairs
affairs
in 2016
in 2016 when
when MM MM was
was in
in aa rehabilitation
rehabilitation facility
facility recuperating
recuperating from
from injuries
injuries sustained
sustained from
from
104
multiple falls.
multiple falls. She moved to
She moved to the
the nursing
nursing home
home in in 2017
2017 after
after the
the onset
onset of
of dementia.1°4
dementia. She She did
did not
not
testify at the
testify at the hearing.
hearing.

Hicks acquired
Hicks acquired MM
MM asas aa customer
customer in
in 2010
2010 after
after introducing
introducing himself
himself to
to her
her with
with aa cold
cold
call. As
call. As with
with other
other customers, Hicks initially
customers, Hicks recommended that
initially recommended that she
she purchase
purchase aa Jackson
Jackson Life
Life
variable annuity,
variable annuity, with
with diversified subaccounts and
diversified subaccounts and aa guaranteed income benefit,
guaranteed income benefit, which
which Hicks
Hicks
thought was
thought was aa reasonably
reasonably conservative investment for
conservative investment her. MM
for her. MM continued as Hicks'
continued as Hicks’ customer
customer
when he
when associated with
he associated with Southeast
Southeast Investments
Investments in 2014. 105
in 2014.1°5

In July 2014,
In July 2014, when
when MMMM waswas 87
87 years
years old,
old, on
on Hicks'
Hicks’ recommendation
recommendation she she invested
invested
$37,900 in a non-traded
$37,900 in a non-traded REIT,
REIT, American
American Retail Centers of America,
Retail Centers of America, Inc.
Inc. (“ARC
("ARC Retail”).
Retail"). 106
According to
According to Hicks,
Hicks, MMMM made
made the
the investment
investment within
within an
an IRA and he
IRA and he filled
filled out
out an
an IRA
IRA
107
application for
application her. In
for her.1°7 In the
the suitability
suitability section,
section, Hicks
Hicks estimated MM’s annual
estimated MM's annual income
income toto be
be
between $25,000
between $25,000 andand $50,000,
$50,000, her net worth
her net worth more
more than
than $500,000,
$500,000, her
her liquid assets between
liquid assets between
$100,000 and
$100,000 and $500,000,
$500,000, andand identified
identified her
her investment objective as
investment objective as capital appreciation. Hicks
capital appreciation. Hicks
described MM's
described MM’s risk tolerance as
risk tolerance as moderate,
moderate, stated
stated her
her investment
investment time
time horizon
horizon toto be
be

98
98 Tr. 707;
Tr. CX-86, at
707; CX-86, at 9.
9.
99
99 Tr. 708;
Tr. CX-86, at
708; CX-86, at 8.
8.
1100 CX-12, at
°° CX-12, at 3.
3.
1101Tr. 256-58.
°1 Tr. 256–58.
102
1 Tr. 238-39.
°2 Tr. 238–39.
1103 Tr. 247.
°3 Tr. 247.
104
104 Tr. 780-83.
Tr. 780–83.
1105Tr. 112-113.
°5 Tr. 112–113.
106
1 Stip. ¶
°6 Stip. ¶ 13.
13.
107
107 Tr. 169-70.
Tr. 169–70.

12
12
intermediate, and
intermediate, and her
her investment
investment knowledge
knowledge as good. 108 Where
as good.1°8 Where the
the form asked for
form asked for aa dollar
dollar
amount of
amount of assets
assets held away from
held away from Southeast
Southeast Investments, Hicks wrote
Investments, Hicks wrote zero, indicating that
zero, indicating that she
she
109
had no
had funds held
no funds at another
held at another firm.
finn.1°9

In June 2015,
In June 2015, Hicks
Hicks recommended,
recommended, and and MM
MM purchased,
purchased, shares
shares of
of another
another non-traded
non-traded
REIT, American
REIT, American Realty
Realty Capital
Capital New
New York
York City
City REIT,
REIT, Inc.
Inc. ("ARC
(“ARC NYC")
NYC”) for $12,500. 110 The
for $12,500.110 The
investment profile
investment profile he
he entered
entered on
on this
this account
account application
application differed
differed from the application
from the application he had
he had
filled out just
filled out just eleven
eleven months
months earlier.
earlier. On
On this
this one,
one, Hicks
Hicks wrote
wrote that
that MM
MM owned
owned $150,000
$150,000 inin short-
short-
111
term assets
term assets held
held away
away from
from Southeast
Southeast Investments.
Investments." On aa Southeast
On REIT disclosure
Southeast REIT disclosure form
form
accompanying the
accompanying the 2015
2015 account
account application,
application, he
he wrote
wrote that
that MM's
MM’s net
net worth
worth was
was $400,000
$400,000 andand
112
her liquid
her assets were
liquid assets were $150,000.112
$150,000.

When questioned
When about his
questioned about his 2015 description of
2015 description of MM's
MM’s investment
investment profile,
profile, Hicks
Hicks revealed
revealed
that he
that he did
did not obtain the
not obtain the information
information from her. Hicks
from her. Hicks admitted
admitted that,
that, "in
“in hindsight,"
hindsight,” hehe should
should
have asked
have asked her
her directly
directly about
about things
things like her income
like her income and and net
net worth
worth to
to determine
determine whether
whether MMMM
113
met the
met the prospectus'
prospectus’ minimum
minimum suitability
suitability requirements.
requirements.113 HicksHicks admitted
admitted that
that MM
MM diddid not say
not say
114
she had
she had $150,000
$150,000 in short-term assets
in short-term assets held
held away
away from
from Southeast
Southeast Investments.
Investments.114 When pressed,
When pressed,
he was
he was unable
unable toto explain
explain how,
how, eleven
eleven months
months after
after her
her July 2014 investment,
July 2014 investment, sheshe acquired
acquired
115
$150,000 in
$150,000 in assets
assets held away. MM
held away.115 MM also
also did
did not
not tell
tell Hicks
Hicks she
she had
had $150,000
$150,000 inin liquid assets.
liquid assets.
He testified
He testified that
that he
he inferred
inferred the
the amount
amount ofof her
her liquid
liquid assets
assets from
from "her
“her lifestyle” and her
lifestyle" and her recent
recent
purchase of
purchase of aa condominium.
condominium. Hicks Hicks conceded
conceded that
that buying
buying aa condominium
condominium would would decrease,
decrease, not
not
116
increase, MM's
increase, MM’s liquid assets. Hicks
liquid assets.116 Hicks also
also admitted
admitted that
that MM
MM never
never told
told him
him she
she had
had aa net
net worth
worth
117
of $400,000.117
of $400,000. As As for
for describing MM’s investment
describing MM's investment objective
objective asas capital appreciation, instead
capital appreciation, instead of
of
income, Hicks stated that MM, who was then 88, had an objective of “a combination
income, Hicks stated that MM, who was then 88, had an objective of "a combination of income of income
and capital
and appreciation.” 118
capital appreciation."118

After WM
After WM obtained
obtained the
the power
power of
of attorney
attorney to
to handle
handle his aunt’s financial
his aunt's affairs, he
financial affairs, he had
had
several email
several email exchanges
exchanges and
and phone
phone conversations
conversations with
with Hicks.
Hicks. WM
WM asked
asked for
for help
help in
in reissuing
reissuing
some dividend
some dividend checks
checks that
that had
had been
been sent
sent to
to MM
MM and
and never
never cashed.
cashed. In
In aa July 2017 email
July 2017 email to
to Hicks,
Hicks,
WM explained
WM explained that
that his
his aunt
aunt had
had been
been diagnosed
diagnosed with
with dementia
dementia and
and had
had not
not cashed
cashed dividend
dividend

108
188 CX-17, at
CX-17, at 14.
14.
109
Tr. 175-76;
1°9 Tr. 175–76; CX-17, at 15.
CX-17, at 15.
110
11° Stip. II¶ 14.
Stip. 14.
111 CX-18,
CX-18, at
at 4.
4.
112
112 CX-18, at
CX-18, at 5.
5.
113
113 Tr. 122-24.
Tr. 122–24.
114
114 Tr. 122.
Tr. 122.
115
115 Tr. 175-76.
Tr. 175–76.
116
116 Tr. 119-20.
Tr. 119–20.
117
117 Tr. 121.
Tr. 121.
118
118 Tr. 124-25.
Tr. 124–25.

13
13
checks she
checks she received
received for
for about year. 119 The
about aa year.119 The effort
effort was
was only
only partially
partially successful.
successful. WM
WM sent
sent aa final
final
120
email to
email to Hicks
Hicks in
in August
August 2017
2017 and
and has
has had no contact
had no contact with
with him since then.12°
him since then.

In
In September 2017, WM
September 2017, WM contacted
contacted Southeast
Southeast Investments to express
Investments to express his
his concerns about
concerns about
MM’s non-traded
MM's non-traded REIT
REIT holdings.
holdings. He
He explained
explained that
that MM
MM had
had limited
limited resources
resources and
and needed
needed to
to
apply for
apply for Medicaid
Medicaid to
to remain
remain at
at her
her nursing
nursing home.
home. He He learned
learned that
that her
her ownership
ownership of
of the
the REITs
REITs
would prevent
would prevent her
her from qualifying for
from qualifying Medicaid assistance.
for Medicaid assistance. He
He attempted
attempted toto liquidate
liquidate MM's
MM’s
121
investments to
investments to help
help pay
pay for her care
for her care but
but was
was initially
initially unsuccessful.121
unsuccessful.

After examining
After MM’s financial
examining MM's situation, WM
financial situation, WM concluded that when
concluded that when Hicks
Hicks made
made his
his
REIT recommendations
REIT recommendations to to his
his aunt,
aunt, her
her financial profile was
financial profile was not
not as
as Hicks
Hicks had
had portrayed
portrayed itit in the
in the
application documents.
application MM’s net
documents. MM's net worth
worth was
was less than $200,000,
less than $200,000, not $400,000. She
not $400,000. did not
She did have
not have
122
$150,000 in
$150,000 in liquid assets, but
liquid assets, but less
less than
than $100,000.122
$100,000. Comparing
Comparing WM's
WM’s andand Hicks'
Hicks’ testimony
testimony
about MM's
about MM’s investor
investor profile,
profile, which
which Hicks
Hicks admits
admits he
he based
based partly
partly on
on inference, and considering
inference, and considering
Hicks’ inability
Hicks' to explain
inability to the basis
explain the basis for
for his
his estimation
estimation of
of her
her liquid assets, we
liquid assets, we conclude
conclude that
that
Hicks inflated
Hicks inflated MM's
MM’s June 2015 financial
June 2015 financial profile.
profile. Thus, we find
Thus, we that MM's
find that MM’s twotwo investments
investments in in
non-traded REITs,
non-traded REITs, totaling
totaling $50,400, constituted approximately
$50,400, constituted approximately 50 percent of
50 percent of her
her liquid assets
liquid assets
before she
before made the
she made investments. 123
the investments.123

By the
By the end
end of
of the
the year,
year, WM
WM was
was able
able to
to liquidate his aunt's
liquidate his aunt’s two REITs. 124 He
two REITs.124 He eventually
eventually
received $34,000
received $34,000 for
for her
her investment
investment in
in ARC
ARC Retail,
Retail, and
and around
around $10,000
$10,000 for
for the
the ARC
ARC NYC
NYC
shares. 125
shares.125

4. Customer
4. Customer RT
RT

Customer RT,
Customer RT, aa widow
widow and
and retired
retired high
high school
school teacher,
teacher, born
born in
in 1941,
1941, lives
lives with
with her
her
126
companion in
companion in aa retirement
retirement home
home in
in Burlington,
Burlington, North
North Carolina.126
Carolina. RT RT had
had four daughters, one
four daughters, one of
of
127
whom died
whom died in
in 2012.127
2012. RT RT inherited
inherited part
part of
of her
her daughter’s
daughter's estate. Hicks contacted
estate. Hicks contacted her by aa cold
her by cold
call in
call early 2013.
in early 2013. Having
Having just
just received
received funds
funds from
from the
the inheritance, RT agreed
inheritance, RT agreed to
to meet
meet with
with
Hicks. She
Hicks. thought he
She thought could help
he could help her
her decide what to
decide what to do
do with
with the funds. 128
the funds.128

119
119 Tr. 789;
Tr. 789; CX-114,
CX-114, at
at 15.
15.
120
120 Tr. 789-90.
Tr. 789–90.
121
121 Tr. 790-92;
Tr. 790–92; CX-41.
CX-41.
122
122 Tr. 790-95.
Tr. 790–95.
123
123 Tr. 794-95;
Tr. 794–95; CX-41.
CX-41.
124
124 Tr. 792.
Tr. 792.
125
125 Tr. 798-99.
Tr. 798–99.
126
126 Tr. 525–26,
Tr. 530.
525-26,530.
127
127 Tr, 527.
Tr, 527.
128
128 Tr. 532.
Tr. 532.

14
14
 RT’s prior
RT's prior investing
investing experience
experience waswas limited
limited to
to aa retirement
retirement account
account through
through her
her school
school
129
district, into
district, into which
which she
she made
made thethe minimum
minimum allowable
allowable contributions.129
contributions. RT RT told
told Hicks
Hicks she
she was
was
interested in
interested in "non-risky
“non-risky andand conservative"
conservative” investments
investments andand her
her risk
risk tolerance
tolerance was
was "ultra-
“ultra-
conservative.” 130 Hicks
conservative."130 Hicks assured
assured RT RT that
that he only recommended
he only annuities to
recommended annuities to his
his clients
clients and
and that
that
his recommendations
his recommendations wouldwould protect
protect her
her money
money soso that
that on
on her
her death,
death, her children would
her children would inherit
inherit
131
it. Shortly
it.131 Shortly after
after their
their first conversation, on
first conversation, on Hicks'
Hicks’ recommendation,
recommendation, RT RT purchased
purchased two
two
Jackson Life variable
Jackson Life variable annuities
annuities in in February
February 2013,
2013, the
the first for $40,000
first for $40,000 andand the
the second
second for
for
$28,736. 132 Approximately
$28,736.132 Approximately 90 percent of
90 percent of the
the funds
funds came
came from
from her
her daughter's estate. 133
daughter’s estate.133

In
In 2014 and 2015,
2014 and 2015, Hicks
Hicks recommended
recommended five more investments,
five more totaling $87,683,
investments, totaling $87,683, in
in non-
non-
traded REITS:
traded REITS: (i) one in
(i) one American Realty
in American Realty Capital
Capital Healthcare
Healthcare II, Inc. ("ARC
II, Inc. (“ARC Healthcare");
Healthcare”); (ii)
(ii)
134
one in
one ARC Retail;
in ARC Retail; and
and (iii)
(iii) three
three in ARC NYC.134
in ARC NYC.

RT does
RT does not recall what
not recall what Hicks
Hicks told
told her about the
her about the REITs,
REITs, except
except that
that he did not
he did not describe
describe
them as
them as high risk. If
high risk. If he had, she
he had, she would
would not
not have invested in
have invested them. RT
in them. RT considered Hicks reliable,
considered Hicks reliable,
depended on
depended his expertise,
on his expertise, and
and decided
decided to
to go along with
go along with his
his recommendations
recommendations so so long as they
long as they
were conservative.
were conservative. She was interested
She was interested in moderate growth
in moderate growth and
and avoiding risk. 135
avoiding risk.135

Hicks claimed
Hicks claimed that
that RT
RT was
was "worried
“worried about
about the
the stock
stock market"
market” and
and asked
asked him
him if
if there
there was
was
136
an alternative.
an alternative. Hicks
Hicks told
told her
her that
that she
she could
could earn
earn six percent interest
six percent interest in
in REITs.136
REITs. He He testified
testified that
that
he did
he not give
did not her specific
give her specific information about what
information about what aa REIT
REIT invested
invested in, because RT
in, because RT "was
“was
relatively naive
relatively naive with investments.” 137
with investments."137

In July 2014
In July 2014 Hicks
Hicks recommended
recommended that that RT
RT invest
invest $25,000
$25,000 in
in ARC
ARC Healthcare
Healthcare andand
138
$25,000 in
$25,000 in ARC
ARC Retail.138
Retail. In In the
the new
new account
account applications
applications and
and subscription agreements for
subscription agreements both,
for both,
Hicks described her investment objective as preservation of capital and her risk tolerance
Hicks described her investment objective as preservation of capital and her risk tolerance as as
moderate. Hicks
moderate. Hicks viewed
viewed her
her as
as aa conservative
conservative investor
investor with
with low investment knowledge.
low investment knowledge. HeHe
estimated her
estimated her annual
annual income
income to to be
be in
in the
the range
range of
of $25,000
$25,000 to
to $49,999, her liquid
$49,999, her assets between
liquid assets between
139
$100,000 and
$100,000 and $149,000, and her
$149,000, and net worth
her net worth between
between $250,000
$250,000 and
and $499,999.
$499,999.139

129
129 Tr. 533.
Tr. 533.
130
130 Tr. 529,
Tr. 535.
529,535.
131
131 Tr. 535.
Tr. 535.
132
132 Tr. 271-73,
Tr. 271–73, 537–39;
537-39; CX-35;
CX-35; CX-36.
CX-36.
133
133 Tr. 528.
Tr. 528.
134 cx_115.
134
CX-115.
135
135 Tr. 542–43.
Tr. 542-43.
136
136 Tr. 292.
Tr. 292.
137
137 Tr. 292-93.
Tr. 292–93.
138
138 Tr. 275,
Tr. 275, 551; CX-115.
551; CX-115.
139
139 Tr. 277-81;
Tr. 277–81; CX-27,
CX-27, at
at 3-4;
3–4; CX-28,
CX-28, at
at 3-4.
3–4.

15
15
 Hicks did
Hicks did not
not inform
inform RT,
RT, because
because he
he did
did not
not know,
know, that
that she
she did
did not
not meet
meet the
the minimum
minimum
suitability requirements
suitability requirements described
described in
in the
the prospectuses.
prospectuses. HeHe called
called this
this an
an "oversight,"
“oversight,” and
and "poor
“poor
judgment.” Nonetheless,
judgment." Nonetheless, Hicks
Hicks asserted,
asserted, RT
RT was
was living
living with
with aa companion,
companion, "on
“on his
his premises
premises atat
140
his expense” who “could
his expense" who "could easily
easily afford”
afford" the
the risks.
risks.14° He
He admitted,
admitted, however,
however, that
that RT
RT never
never told
told
him that
him that he
he could consider her
could consider her companion's
companion’s assets
assets when
when estimating
estimating her
her net worth. 141
net worth.141

In the spring
In the spring ofof 2015,
2015, Hicks
Hicks recommended
recommended that that RT
RT make
make three
three investments
investments in in ARC
ARC
142
NYC. The
NYC.142 The first, in March,
first, in March, was
was for $10,000. In
for $10,000. In her new account
her new account form for the
form for the purchase,
purchase, Hicks
Hicks
identified RT's
identified RT’s investment objective as
investment objective as capital
capital appreciation.
appreciation. When
When asked
asked ifif RT
RT told
told him she had
him she had
changed her
changed objective from
her objective preservation of
from preservation of capital, as stated
capital, as stated in
in her
her investment profile eight
investment profile eight
months earlier,
months earlier, Hicks
Hicks said
said she
she had not, but
had not, but that
that because
because RTRT had
had moved
moved into
into aa retirement
retirement home
home
with her
with her companion,
companion, he “was of
he "was of the
the strong impression that
strong impression that her
her finances
finances had
had improved
improved
greatly.” 143
greatly."143

In the new
In the new account
account application,
application, Hicks
Hicks significantly
significantly increased
increased his
his estimate
estimate of of RT's
RT’s liquid
liquid
assets. Nine
assets. Nine months
months earlier,
earlier, he represented that
he represented that her
her liquid assets were
liquid assets were in
in the
the range
range ofof $100,000
$100,000 toto
$149,999. In
$149,999. In 2015,
2015, however,
however, hehe valued
valued them
them between
between $250,000
$250,000 and $499,999. 144 In
and $499,999.144 In the
the
suitability section
suitability section of
of an
an accompanying
accompanying Southeast
Southeast Investments
Investments disclosure
disclosure letter, Hicks wrote
letter, Hicks wrote
145
“425,000” as
"425,000" as the
the value of RT's
value of RT’s net worth and
net worth and also
also the
the total
total of
of her
her liquid assets. When
liquid assets.145 When asked,
asked,
Hicks stated
Hicks stated that
that he did not
he did “know where
not "know where the
the number
number came
came from,” although he
from," although he claimed
claimed hehe did
did
not "just
not “just make
make [it]
[it] up."
up.” But
But he
he acknowledged
acknowledged that
that some
some of
of his
his entries to her
entries to investment profile
her investment profile
“guesswork.” 146
were "guesswork."146
were

Hicks recommended,
Hicks recommended, andand RT
RT made,
made, twotwo more
more investments
investments in
in ARC
ARC NYC,
NYC, both
both in
in April
April
2015. One was for $5,000 that RT funded by a withdrawal from a variable annuity, paying aa
2015. One was for $5,000 that RT funded by a withdrawal from a variable annuity, paying
$160 penalty. 147 The
$160 penalty.147 The other
other was
was for
for $22,683.
$22,683. Hicks
Hicks believed
believed RT
RT purchased
purchased it
it with
with inherited
inherited
148
funds. The account
funds.148 The account documents
documents for all three
for all three of
of RT's
RT’s ARC
ARC NYC
NYC investments
investments describe the same
describe the same
149
objectives and
objectives and investment
investment profile
profile for
for RT.149
RT.

In RT’s three
In RT's three ARC
ARC NYC
NYC account
account documents,
documents, Hicks
Hicks also
also elevated
elevated RT's
RT’s investment
investment
knowledge from
knowledge from low to moderate.
low to moderate. He
He explained
explained that
that he
he "assumed
“assumed she
she had
had learned
learned something
something

140
149 Tr. 288-89.
Tr. 288–89.
141
141 Tr. 289-90.
Tr. 289–90.
142
142 Tr. 298-99;
Tr. 298–99; CX-115.
CX-115.
143
143 Tr. 300-01;
Tr. 300–01; CX-29, at 3.
CX-29, at 3.
144
144 Tr. 307;
Tr. 307; CX-29,
CX-29, at
at 4.
4.
145
145 Tr. 309;
Tr. 309; CX-29,
CX-29, at
at 5.
5.
146
Tr. 311–12.
146 Tr. 311 12.

147
147 Tr. 315-17;
Tr. 315–17; CX-30, at 3.
CX-30, at 3.
148
148 Tr. 325-26;
Tr. 325–26; CX-31.
CX-31.
149
149 Tr. 325;
Tr. 325; CX-29,
CX-29, at
at 3;
3; CX-30, at 4;
CX-30, at 4; CX-31,
CX-31, at
at 3.
3.

16
16
from having been
from having been in the variable
in the variable annuities
annuities for
for aa couple
couple of
of years"
years” and
and from
from inheriting
inheriting her
her
150
daughter’s investment
daughter's investment account.150
account. HicksHicks made
made other
other assumptions
assumptions inin filling out documents
filling out documents for for
RT’s ARC
RT's ARC NYC
NYC investments.
investments. He
He wrote
wrote that
that RT
RT hadhad $250,000
$250,000 in
in short-term
short-term assets
assets held
held away
away
151
from
from Southeast
Southeast Investments.
Investments.151 He assumed
He assumed they
they were
were short
short term,
term, and
and he
he could
could not
not recall
recall if
if RT
RT
152
told him
told him the
the amount.152
amount.

RT’s testimony
RT's testimony challenged Hicks’ changes
challenged Hicks' changes toto her
her investment profile in
investment profile in 2015.
2015. She insisted
She insisted
153
that her
that her investment
investment objective was preservation
objective was preservation ofof capital and "never
capital and “never varied
varied from that.” RT
from that."153 RT was
was
interested in
interested in moderate
moderate growth
growth and
and did
did not
not want
want to
to "knowingly
“knowingly invest
invest in
in anything
anything that
that was
was high
high
risk.” RT
risk." RT "depended
“depended on on his
his expertise"
expertise” and
and was
was willing
willing toto do
do whatever
whatever Hicks
Hicks recommended
recommended "just “just
so long
so long as
as it's
it’s conservative."
conservative.” If Hicks had
If Hicks had described
described his
his recommendations
recommendations as as high
high risk,
risk, she
she
154
“would not
"would not have
have invested
invested in
in them."154
them.” Her Her investment knowledge, which
investment knowledge, which Hicks
Hicks rated
rated as
as low
low inin
2014, but
2014, but moderate
moderate in 2015, had
in 2015, not changed:
had not it was
changed: it was always
always low.
low. Hicks'
Hicks’ entry
entry stating
stating she
she had
had
$250,000 in
$250,000 in short-term
short-term assets
assets held away was
held away was false;
false; she
she had none. 155
had none.155

RT testified
RT testified that
that Hicks'
Hicks’ estimate
estimate ofof her
her liquid
liquid assets
assets on
on the
the new
new account
account form
form for her
for her
March 2015
March 2015 ARCARC NYCNYC purchase
purchase was
was "inflated,"
“inflated,” and
and that
that Hick's
Hick’s entry
entry showing
showing her
her net
net worth
worth to
to
156
be $425,000
be $425,000 waswas "much
“much higher"
higher” than
than her
her actual
actual net
net worth.156
worth. HicksHicks had
had written
written that
that her
her reason
reason
for
for investing
investing inin aa REIT
REIT instead
instead of
of aa mutual
mutual fund or other
fund or other investment
investment waswas to
to "Hedge
“Hedge stock
stock
investments.” RT
investments." RT said
said she
she did not write
did not write those
those words,
words, and
and had
had "no
“no idea” what they
idea" what meant. 157 RT
they meant.157 RT
confirmed, as
confirmed, as Hicks
Hicks conceded
conceded in
in his
his testimony,
testimony, that
that he
he did
did not
not inform
inform her
her that
that the
the REITs
REITs carried
carried
aa high
high degree
degree of of risk,
risk, and
and that
that she
she should
should not
not invest
invest if
if she
she could
could not
not afford
afford to
to lose
lose all
all of
of her
her
funds. Hicks did
funds. Hicks did not
not mention
mention that
that RT
RT might
might bebe overconcentrating
overconcentrating her her funds
funds in
in speculative
speculative
158
securities.
securities.158

RT made
RT made it
it clear that she
clear that she "[a]bsolutely"
“[a]bsolutely” did not tell
did not tell Hicks
Hicks he
he could
could include
include her
her
companion’s assets
companion's assets in calculating her
in calculating her net
net worth
worth oror liquid assets. RT
liquid assets. RT insisted
insisted that
that Hicks
Hicks knew that
knew that
159
she and
she and her companion kept
her companion their assets
kept their assets "[t]otally
“[t]otally separated."159
separated.” When When RTRT finished
finished her
her direct
direct
testimony, Hicks
testimony, Hicks did
did not
not cross
cross examine.
examine. Instead,
Instead, he
he stated
stated that
that RT
RT is
is "a
“a very
very honest person.” 160
honest person."16°

150
159 Tr. 301-02.
Tr. 301–02.
151
CX-29, at
151 CX-29, 4; CX-30,
at 4; CX-30, at
at 5;
5; CX-31, at 4.
CX-31, at 4.
152
152 Tr. 306-07.
Tr. 306–07.
153
153 Tr. 553.
Tr. 553.
154
154 Tr. 543.
Tr. 543.
155
155 Tr. 565–67.
Tr. 565-67.
156
156 Tr. 570–71.
Tr. 570-71.
157
157 Tr. 571.
Tr. 571.
158
158 Tr. 542–43,
Tr. 559–561, 575.
542-43,559-561,575.
159
159 Tr. 531–32.
Tr. 531-32.
160
169 Tr. 586.
Tr. 586.

17
17
 The Hearing Panel
The Hearing Panel agrees.
agrees. Based
Based onon our
our assessment
assessment ofof RT's
RT’s forthright
forthright demeanor,
demeanor, we we find
find
her testimony,
her testimony, where
where it
it differs
differs from that of
from that of Hicks,
Hicks, to
to be
be more
more credible.
credible. We
We find
find Hicks'
Hicks’
explanations of
explanations of the
the changes
changes hehe made
made toto RT's
RT’s investment
investment profile
profile in
in the
the account
account applications
applications for
for
her three ARC NYC investments to be inconsistent and unsatisfactory. We conclude
her three ARC NYC investments to be inconsistent and unsatisfactory. We conclude that Hicks that Hicks
improperly inflated
improperly inflated his
his representations
representations ofof RT's
RT’s net
net worth
worth and
and liquid
liquid assets
assets in
in those
those documents.
documents.
Hicks made
Hicks made unfounded
unfounded assumptions
assumptions that
that changes
changes had
had occurred
occurred to
to improve
improve her
her financial
financial situation,
situation,
and simply
and simply made
made upup the
the numbers.
numbers.

5. Customer
5. Customer NM
NM

Customer NM,
Customer NM, born
born in 1932, 161 described
in 1932,161 described by
by her
her daughter
daughter as
as aa "housewife
“housewife by trade,” 162
by trade,"162
once owned
once owned and
and operated
operated aa mobile
mobile home
home park
park with
with her
her first
first husband. Before meeting
husband. Before meeting Hicks,
Hicks, NM
NM
had some
had some investment
investment experience
experience from
from aa brokerage
brokerage account
account she
she obtained
obtained from
from her
her first
first husband
husband
163
when they
when they divorced,
divorced, and
and another
another she
she inherited
inherited when
when her second husband
her second husband died
died in
in 2006.
2006.163 She
She
164
lived near Pinehurst,
lived near Pinehurst, North
North Carolina
Carolina from 2009 until
from 2009 until her
her death in August
death in August 2018.
2018.164
165
Hicks acquired
Hicks acquired NM
NM asas aa customer after aa cold
customer after cold call.
cal1.165 Hicks recommended
Hicks recommended aa Jackson
Jackson Life
Life
variable annuity,
variable annuity, which
which she
she opened
opened in
in June 2010 with
June 2010 with aa $172,000
$172,000 investment.
investment. Following
Following Hicks'
Hicks’
recommendations, she
recommendations, she made
made additional
additional investments
investments in in the annuity. 166 By
the armuity.166 By the
the end
end of
of September
September
167
2010 its
2010 value had
its value had appreciated
appreciated to
to $500,802.167
$500,802. In In February
February 2012,
2012, Hicks
Hicks recommended
recommended thatthat NM
NM
168
purchase aa second
purchase variable annuity
second variable annuity for
for $50,000.
$50,000.168 At the
At the time,
time, Hicks
Hicks considered the variable
considered the variable
annuities to
annuities to be
be reasonably
reasonably conservative
conservative investments,
investments, andand appropriate
appropriate for her. 169
for her.169

When Hicks
When Hicks associated
associated with
with Southeast Investments in
Southeast Investments in April
April 2014,
2014, NM
NM was
was 81 years
81 years
old. 170 During
old.17° During the
the following three years, Hicks recommended, and NM made, eight investments
following three years, Hicks recommended, and NM made, eight investments
in six
in six different
different non-traded REITs, 171 five
non-traded REITs,171 five sponsored
sponsored by
by ARC:
ARC: ARC
ARC Retail,
Retail, ARC
ARC NYC,
NYC, American
American
Realty Capital
Realty Capital Global
Global Trust,
Trust, Inc.
Inc. (“ARC
("ARC Global”), American Realty
Global"), American Realty Capital
Capital Hospitality
Hospitality Trust
Trust
172
(“ARC Hospitality"),
("ARC Hospitality”), and
and Phillips
Phillips Edison Grocery Center
Edison Grocery Center REIT
REIT II,
II, Inc. (“Phillips Edison”).
Inc. ("Phillips Edison").172
He also
He also recommended
recommended one one other
other non-traded
non-traded REIT,
REIT, Steadfast Apartment REIT
Steadfast Apartment REIT III
III

161
Tr. 593.
161 Tr. 593.

162
Tr. 595.
162 Tr. 595.

163
163 Tr. 596-98.
Tr. 596–98.
164
Tr. 593.
164 Tr. 593.

165
165 Tr. 594.
Tr. 594.
166
166 Tr. 362-63;
Tr. 362–63; CX-33,
CX-33, at
at 3.
3.
167
167 CX-33, at
CX-33, at 35.
35.
168
168
Tr. - CX-32,
373–75;
Tr. 373-75; CX-32, at
at 88-89.
88–89.
169
169 Tr. 365-66.
Tr. 365–66.
170
170
Tr. 337–38.
Tr. 337-38.
171
171 Tr. 686-87;
Tr. 686–87; Stip.
Stip. ¶¶ 16.
16.
172
172 Tr. 338-39;
Tr. 338–39; Stip.
Stip. ¶¶
¶¶ 18-22.
18–22.

18
18
(“Steadfast”). 173 NM
("Steadfast").173 NM funded
funded many
many ofof these
these investments
investments by
by withdrawals
withdrawals from
from her
her variable
variable
annuities. She
annuities. was 84
She was years old
84 years old in
in July 2017 when
July 2017 when she
she made
made her
her last
last REIT
REIT purchase
purchase for
for
174
$124,000, bringing
$124,000, bringing her
her total
total investments
investments inin non-traded
non-traded REITs
REITs to
to $459,272.174
$459,272.

Hicks acknowledged
Hicks acknowledged that
that his
his recommendations
recommendations between
between June 2014 and
June 2014 and July 2017 caused
July 2017 caused
175
NM to
NM to move
move large
large sums
sums from her liquid
from her liquid variable
variable annuities
annuities to
to illiquid
illiquid non-traded
non-traded REITs.175
REITs. Her Her
third non-traded
third non-traded REIT
REIT purchase,
purchase, of
of ARC
ARC NYC
NYC for
for $60,000
$60,000 in December 2014,
in December entirely
2014, entirely
liquidated the variable
liquidated the variable annuity
annuity she
she purchased
purchased in
in 2012.
2012. NM's
NM’s last
last REIT
REIT investment
investment of
of $124,000
$124,000
in July
in 2017 left
July 2017 only $4,000
left only $4,000 in her remaining
in her annuity. 176
remaining armuity.176

Hicks justified
Hicks justified the
the recommendations
recommendations because,
because, he
he said, NM told
said, NM told him
him that
that "she
“she had
had
invested independently
invested independently in in real
real estate and had
estate and more success
had more than she
success than she had in the
had in the stock market.” 177
stock market."177
Hicks claimed
Hicks claimed that
that he
he and
and NM
NM shared
shared the
the view
view that
that investing
investing in
in real-estate-related
real-estate-related securities
securities
would be
would be preferable
preferable to
to buying
buying stocks
stocks because
because it
it would
would expose
expose her
her to
to less volatility.178
less volatility.

In the account
In the account application
application for
for her
her June 2014 investment
June 2014 investment of
of $53,850
$53,850 inin the
the ARC
ARC Global
Global
REIT, Hicks
REIT, Hicks estimated
estimated NM's
NM’s income
income as
as between
between $50,000
$50,000 to
to $100,000;
$100,000; net
net worth
worth at
at over
over
$500,000; liquid
$500,000; liquid assets
assets at
at over
over $500,000;
$500,000; and
and her
her time
time frame
frame for
for the
the investment
investment six
six to
to ten
ten years.
years.
Hicks claimed
Hicks claimed thethe estimates
estimates were
were based
based on
on what
what NM
NM told
told him,
him, and
and that
that his
his indication
indication of
of the
the
investment time
investment time frame,
frame, despite
despite her
her age,
age, was
was based
based on
on her
her good
good health.
health. He
He indicated
indicated that
that the
the
purpose of
purpose the investment
of the investment was
was to
to generate
generate income. Hicks identified
income. Hicks identified NM's
NM’s investment
investment objectives,
objectives,
in order
in order of
of priority,
priority, as
as capital appreciation, income,
capital appreciation, income, preservation
preservation of
of capital,
capital, speculation
speculation and
and
179
trading profits.179
trading profits.

In late July
In late July 2014,
2014, Hicks
Hicks recommended,
recommended, andand NM
NM purchased,
purchased, shares
shares of
of ARC
ARC Retail
Retail for
for
$39,800. Hicks’ estimates for NM’s income, net worth, and liquid assets, and the time
$39,800. Hicks' estimates for NM's income, net worth, and liquid assets, and the time frame forframe for
the investment,
the investment, were
were the
the same
same asas he
he had
had indicated
indicated on
on the
the new
new account
account application
application for
for her
her
purchase of
purchase of ARC
ARC Global
Global in
in the
the previous
previous month:
month: annual
annual income
income between
between $50,000
$50,000 and
and $100,000;
$100,000;
net worth
net worth of
of over
over $500,000;
$500,000; liquid assets of
liquid assets of over
over $500,000;
$500,000; time
time frame of six
frame of to ten
six to years. 180
ten years.18°

In December 2014,
In December 2014, Hicks
Hicks recommended, and NM
recommended, and NM purchased,
purchased, $60,000
$60,000 in ARC NYC.
in ARC NYC. OnOn
the account
the account application
application for this purchase,
for this purchase, Hicks
Hicks checked
checked aa box
box indicating
indicating that
that NM
NM had
had an
an annual
annual

173
173 Stip. ilili
Stip. ¶¶ 23-25.
23–25.
174
174 Tr. 631-32;
Tr. 631–32; CX-115;
CX-115; Stip. ¶ 16.
Stip. ¶ 16.
175
175 Tr. 339-40.
Tr. 339–40.
176
176 Tr. 377;
Tr. 377; CX-32,
CX-32, at
at 78;
78; CX-33, at 364.
CX-33, at 364.
177
177 Tr. 341.
Tr. 341.
178
178 Tr. 342.
Tr. 342.
179
179 Tr. 414;
Tr. 414; CX-19,
CX-19, at
at 2,6-7.
2, 6–7.
180
1813 Tr. 443-44;
Tr. 443–44; CX-20, at 7.
CX-20, at 7.

19
19
income between
income between $75,000 and $99,999;
$75,000 and net worth
$99,999; net worth of
of over
over $500,000
$500,000 but
but wrote
wrote in
in the
the figure
figure
181
$1,600,000; liquid
$1,600,000; liquid assets
assets of
of over
over $500,000;
$500,000; and
and no
no assets
assets held
held away.181
away.

Just
Just over
over aa year
year later, in July
later, in 2015, in
July 2015, in the
the suitability
suitability section
section of
of the
the application
application for NM’s
for NM's
investment in
investment in Phillips
Phillips Edison REIT, Hicks
Edison REIT, Hicks estimated
estimated NM's
NM’s annual
annual income
income at at $75,000;
$75,000; net worth
net worth
at $1.6
at million; liquid
$1 6 million; assets at
liquid assets at $800,000; and stated
$800,000; and stated that
that her
her reason
reason for
for investing was to
investing was to "hedge
“hedge
stock portfolio."
stock portfolio.” Hicks
Hicks stated
stated that
that NM
NM had zero assets
had zero assets held
held away.
away. He
He also
also indicated
indicated NM,
NM, then
then 83
83
182
years old,
years old, would
would notnot need
need the
the principal
principal invested
invested within
within the
the next
next decade.182
decade. Hicks Hicks testified
testified that
that he
he
could not
could recall if
not recall if NM
NM told
told him
him her
her liquid assets were
liquid assets $800,000. 183
were $800,000.183

A month
A month after
after this,
this, in
in August
August 2015,
2015, in the suitability
in the suitability section
section of
of NM's
NM’s application
application to
to
invest $40,000
invest $40,000 in
in ARC
ARC Hospitality,
Hospitality, Hicks
Hicks estimated NM’s liquid
estimated NM's assets at
liquid assets at $1.1 million, not
$1 1 million, not
$800,000. He
$800,000. He also
also stated
stated that
that she
she had
had $800,000
$800,000 in assets held
in assets held away.
away. 184

When asked
When asked at
at the
the hearing
hearing what
what happened
happened between
between July and August
July and August toto change
change his
his
estimate of
estimate of NM's
NM’s liquid
liquid assets
assets so
so dramatically,
dramatically, HicksHicks testified
testified initially
initially that
that he
he presumed
presumed sheshe had
had
185
sold variable
sold variable armuities.185
annuities. When When asked
asked howhow selling
selling variable annuities, which
variable annuities, which are
are liquid, would
liquid, would
increase her
increase her liquid
liquid assets,
assets, Hicks
Hicks at
at first claimed that
first claimed that he
he did
did not
not know
know ifif variable
variable annuities
annuities are
are
liquid assets. Hicks
liquid assets. Hicks then
then testified
testified that
that he
he could
could not
not explain
explain how
how selling
selling aa liquid
liquid asset
asset can
can increase
increase
one’s liquid
one's liquid assets.
assets. He
He testified
testified that
that he did not
he did know why
not know why his
his estimate
estimate of
of NM's
NM’s liquid assets
liquid assets
186
increased from
increased from $800,000
$800,000 to to $1.1 million in
$1.1 million in aa month.186
month. He He denied
denied the
the increase was related
increase was related to
to his
his
recommending additional
recommending additional purchases
purchases ofof non-traded REITs. 187
non-traded REITs.187

A year
A year later,
later, in
in June 2016, Southeast
June 2016, Investments questioned
Southeast Investments questioned the
the disparity
disparity between
between two
two
of Hicks'
of Hicks’ estimates
estimates ofof NM's
NM’s liquid
liquid assets
assets in
in aa single
single application
application for
for aa $30,000
$30,000 purchase
purchase of
of shares
shares
of the Steadfast REIT. In the suitability section of the new account application, Hicks
of the Steadfast REIT. In the suitability section of the new account application, Hicks wrote that wrote that
NM had
NM had $1.1 million in
$1 1 million in liquid assets, but
liquid assets, but on an accompanying
on an accompanying document,
document, aa REIT
REIT purchase
purchase
disclosure form,
disclosure Hicks wrote
form, Hicks wrote that
that she
she had
had $800,000
$800,000 in in liquid assets. Southeast
liquid assets. Southeast Investments’
Investments'
operations manager
operations manager emailed
emailed Hicks
Hicks that
that the
the liquid assets figures
liquid assets figures needed
needed to match. 188 After
to match.188 After
receiving the
receiving the email,
email, Hicks
Hicks crossed
crossed out
out the
the $800,000
$800,000 estimate
estimate of
of NM's
NM’s liquid
liquid assets,
assets, wrote
wrote in
in the
the

181
181 Tr. 445-46;
Tr. 445–46; CX-21, at 4.
CX-21, at 4.
182
182 Tr. 447-48;
Tr. 447–48; CX-22, at 4-5.
CX-22, at 4–5.
183
183 Tr. 450.
Tr. 450.
184
184 Tr. 452-53;
Tr. 452–53; CX-23, at 5–6.
CX-23, at 5-6.
185
185 Tr. 418.
Tr. 418.
186
186 Tr. 419-421.
Tr. 419–421.
187
187 Tr. 421.
Tr. 421.
188
188 Tr. 421-27;
Tr. 421–27; CX-100.
CX-100.

20
20
figure $1,100,000, and
figure $1,100,000, and initialed
initialed the change. 189 Hicks
the change.189 Hicks made
made the
the change after NM
change after NM had
had signed
signed the
the
190
application on
application on June 16. NM
June 16. NM did not initial
did not the change
initial the or acknowledge
change or acknowledge it.
it.190

Hicks knew
Hicks knew that
that NM
NM funded most of
funded most of her
her numerous
numerous investments
investments inin non-traded
non-traded REITs
REITs
either from
either her variable
from her variable annuities
annuities or
or cash.
cash. Thus,
Thus, between
between June 2014 and
June 2014 and July 2017, NM's
July 2017, NM’s liquid
liquid
191
assets were
assets were decreasing,
decreasing, not
not increasing.191
increasing. By By withdrawing
withdrawing funds
funds from
from her
her variable
variable annuities,
annuities, NM
NM
incurred penalties.
incurred penalties. For
For example,
example, when
when NMNM withdrew
withdrew $30,000
$30,000 from
from anan annuity
annuity to
to purchase
purchase shares
shares
192
of Steadfast
of REIT, she
Steadfast REIT, she wrote
wrote aa note
note saying she was
saying she was aware
aware there
there was
was aa penalty
penalty of
of $600. This
$600.192 This
was aa surrender
was surrender fee. But it
fee. But it was
was only
only part
part of
of the
the penalty
penalty assessed
assessed for
for the
the withdrawal.
withdrawal. There was aa
There was
second surrender
second surrender charge
charge inin the
the amount
amount ofof $638.74,
$638.74, and
and recapture
recapture charges
charges of
of $199.60
$199.60 and
and
193
$196.44, bringing
$196.44, bringing NM's
NM’s actual
actual penalty
penalty to
to approximately
approximately $1,600.193
$1,600. NM'sNM’s note,
note, however,
however, only
only
refers to
refers to aa $600
$600 surrender charge.
surrender charge.

Hicks acknowledged
Hicks acknowledged that that when
when he recommended non-traded
he recommended non-traded REITs
REITs toto NM,
NM, hehe did not
did not
warn her
warn her of the high
of the high degree
degree ofof risk involved, and
risk involved, and that
that he
he did
did not know that
not know that investing
investing in
in them
them
194
involved aa high
involved high level of risk,194
level of risk, eveneven though
though the
the first
first few pages of
few pages of each
each prospectus
prospectus contain
contain
195
virtually identical
virtually identical warnings
warnings making
making the
the high risk and
high risk and illiquidity
illiquidity of
of investing crystal clear.
investing crystal clear.195 He
He
also admitted
also admitted that
that he
he did not warn
did not warn NM
NM of the risk
of the that she
risk that she was
was overconcentrating
overconcentrating her assets in
her assets in
196
illiquid non-traded
illiquid non-traded REITs.196
REITs.

Until 2015,
Until 2015, NMNM waswas vibrant
vibrant and
and independent,
independent, according
according to
to her
her daughter PL. 197 Then
daughter PL.197 Then her
her
health declined,
health and she
declined, and she began
began to
to experience
experience seizures.
seizures. A
A seizure
seizure likely caused aa fall
likely caused fall resulting
resulting in
in aa
198
severe head
severe head injury
injury in February 2018.198
in February 2018. She She was
was hospitalized
hospitalized and
and then,
then, unable
unable to
to care
care for
for herself,
herself,
199
transferred to
transferred to aa skilled
skilled nursing
nursing facility.199
facility. At At that
that time
time PL
PL obtained
obtained aa power
power of
of attorney
attorney toto handle
handle
her mother’s finances.
her mother's finances. 200

189
189 Tr. 429-30;
Tr. 429–30; CX-24, at 5.
CX-24, at 5.
190
19/3 Tr. 430-32.
Tr. 430–32.
191
191 Tr. 453-54.
Tr. 453–54.
192
192 Tr. 614-15;
Tr. 614–15; CX-24, at 2.
CX-24, at 2. The amount of
The amount of this
this surrender
surrender charge
charge was
was actually
actually $628.60.
$628.60.
193
193 Tr. 616-19;
Tr. 616–19; CX-33, at 335-336.
CX-33, at 335–336.
194
194 Tr. 442
Tr. 442 (ARC
(ARC Global);
Global); 452
452 (Phillips
(Phillips Edison);
Edison); 457
457 (ARC
(ARC Hospitality);
Hospitality); 460
460 (Steadfast).
(Steadfast).
195
CX-5, at
195 CX-5, at 1,3
1, 3 (ARC
(ARC Global); CX-7, at
Global); CX-7, at 1-3
1–3 (ARC
(ARC Hospitality);
Hospitality); CX-8,
CX-8, at
at 1-3
1–3 (ARC
(ARC NYC);
NYC); CX-9, at 1,3
CX-9, at 1, 3 (ARC
(ARC
Retail); CX-11, at
Retail); CX-11, at 1,4
1, 4 (Phillips
(Phillips Edison);
Edison); CX-13,
CX-13, at
at 1,3
1, 3 (Steadfast).
(Steadfast).
196
196 Tr. 462-63.
Tr. 462–63.
197
197 Tr. 598.
Tr. 598.
198
198 Tr. 599–600.
Tr. 599-600.
199
199 Tr. 603.
Tr. 603.
Tr. 595.
200 Tr. 595.
200

21
21
 After PL
After PL activated
activated the
the power
power ofof attorney,
attorney, and
and as
as executor
executor of of her
her mother's
mother’s estate,
estate, she
she
201
familiarized
familiarized herself with NM's
herself with NM’s finances
finances and
and investments.201
investments. Her Her assessment
assessment ofof NM's
NM’s financial
financial
profile contrasted
profile contrasted starkly
starkly with
with Hicks'
Hicks’ varying
varying representations
representations in in the
the account
account documents.
documents. PL PL
noted that
noted that when
when NM NM made
made her
her first
first REIT
REIT purchase
purchase in
in 2014,
2014, her annual income
her annual income was
was about
about
$60,000 and
$60,000 and it
it remained
remained roughly
roughly the
the same
same through
through her
her last
last purchase
purchase inin 2017.
2017. NM's
NM’s REIT
REIT
purchases decreased
purchases decreased her
her liquid assets dramatically.
liquid assets dramatically. PL
PL testified
testified that
that Hicks'
Hicks’ estimates
estimates ofof NM's
NM’s
income and
income and assets
assets on
on the
the new
new account
account forms
forms hehe completed
completed were
were inaccurate.
inaccurate. Hicks'
Hicks’ estimate
estimate ofof
$75,000 for
$75,000 NM’s annual
for NM's annual income
income waswas too
too high.
high. His
His estimate
estimate of of NM's
NM’s liquid assets at
liquid assets at $800,000
$800,000
was also
was also too
too high.
high. And
And the
the estimate
estimate of
of her
her net
net worth
worth at
at $1.6
$1.6 million
million was
was "extremely
“extremely too high.” 202
too high."202

After considering
After considering the
the testimony
testimony ofof PL
PL and
and Hicks,
Hicks, assessing
assessing its
its substance
substance as
as well
well as
as the
the
demeanor of
demeanor of each,
each, the
the Hearing
Hearing Panel
Panel credits
credits PL’s testimony about
PL's testimony about her
her mother's
mother’s investment
investment
profile over
profile that of
over that of Hicks.
Hicks. Hicks
Hicks was
was unable to explain
unable to explain why
why his
his estimate
estimate of NM’s liquid
of NM's assets
liquid assets
jumped so
jumped so dramatically
dramatically inin aa single
single month.
month. His
His initial explanation—that he
initial explanation—that he presumed
presumed NMNM sold
sold
variable annuities—does
variable annuities—does notnot withstand
withstand scrutiny.
scrutiny. He
He finally
finally stated
stated that
that he
he did
did not
not know.
know. We note
We note
that Hicks
that Hicks had
had aa financial motive to
financial motive to make
make NM's
NM’s assets
assets on her new
on her new account
account applications
applications appear
appear to
to
qualify her
qualify her for the investments
for the investments he was recommending.
he was recommending. Of Of the
the $35,683
$35,683 inin commissions Hicks
commissions Hicks
gained from
gained REIT investments
from REIT investments byby all
all five
five customers, $26,574 came
customers, $26,574 came from transactions. 203
NM’s transactions.203
from NM's

In March 2018,
In March 2018, aa month
month after
after NM
NM was
was hospitalized,
hospitalized, PL PL sought
sought to to liquidate some of
liquidate some NM’s
of NM's
REIT holdings
REIT holdings toto pay
pay for additional treatments
for additional treatments for
for her,
her, and
and found
found that
that she
she could not. 204 She
could not.204 She
called FINRA's
called FINRA’s Helpline
Helpline for assistance. 205 PL
for assistance.205 PL also
also called
called the
the REITs
REITs and and learned
learned that
that she
she could
could
206
gain access
gain access to
to her
her mother's
mother’s funds
funds only
only if
if NM
NM was
was deemed
deemed disabled
disabled or or had
had died.206
died. According
According to
to
PL, NM could not understand why she was unable to access her funds. PL
PL, NM could not understand why she was unable to access her funds. PL wanted to hire a wanted to hire a
private duty
private duty nurse
nurse toto provide
provide care
care so
so that
that NM
NM could
could return
return home,
home, asas she
she wished,
wished, but
but PL
PL could
could not
not
207
afford the
afford the cost
cost and
and the
the inability
inability to
to access
access NM's
NM’s investments
investments made
made it impossible. PL
it impossible.207 PL learned
learned
that she
that she would
would have
have to
to petition
petition the
the board
board of
of directors
directors ofof each
each of
of the
the REITs
REITs and
and ask
ask for
for approval
approval
to liquidate
to liquidate shares.
shares. The
The process
process went
went onon for
for more
more than
than 18
18 months
months after
after NM
NM died
died in
in August
August
2018. 208
2018.2°8

201
201
Tr.
Tr. 594–95.
594-95.
202
202 Tr. 641-46.
Tr. 641–46.
203
203
CX-116.
CX-116.
204
204 Tr. 625-26.
Tr. 625–26.
205
205 Tr. 627-28.
Tr. 627–28.
206
206 Tr. 628-29
Tr. 628–29
207
207 Tr. 659-60.
Tr. 659–60.
208
208 Tr. 628-30.
Tr. 628–30.

22
22
III.
III. Conclusions of
Conclusions of Law
Law

A.
A. Hicks Failed
Hicks to Fulfill
Failed to His Customer-Specific
Fulfill His Customer-Specific Suitability Obligations
Suitability Obligations

The
The first cause of
first cause of action
action in the Complaint
in the Complaint alleges
alleges that
that Hicks
Hicks made
made unsuitable
unsuitable
recommendations to
recommendations to the
the five senior customers
five senior customers in violation of
in violation of FINRA
FINRA Rules
Rules 2111
2111 and
and 2010.
2010.

FINRA Rule
FINRA Rule 2111(a)
2111(a) describes
describes the
the obligations
obligations of
of aa registered
registered representative
representative to
to ascertain
ascertain
the customer-specific
the suitability of
customer-specific suitability an investment
of an investment before
before recommending
recommending it. it. In pertinent part,
In pertinent part, it
it
states:
states:

[A]n associated
[A]n associated person
person must
must have
have aa reasonable basis to
reasonable basis to believe
believe that
that aa recommended
recommended
transaction or
transaction or investment
investment strategy involving aa security
strategy involving security oror securities
securities isis suitable
suitable for
for
the customer,
the based on
customer, based on the
the information obtained through
information obtained through the
the reasonable
reasonable diligence
diligence
of the
of the member
member or or associated
associated person
person toto ascertain
ascertain the
the customer's
customer's investment
investment profile.
profile.
A customer's
A customer's investment profile includes,
investment profile includes, but
but is
is not
not limited to, the
limited to, the customer's
customer's age,
age,
other investments,
other investments, financial situation and
financial situation and needs,
needs, tax
tax status,
status, investment objectives,
investment objectives,
investment experience,
investment investment time
experience, investment time horizon,
horizon, liquidity needs, risk
liquidity needs, risk tolerance,
tolerance, and
and
any other
any other information the customer
information the customer maymay disclose
disclose to to the
the member
member or or associated
associated
person in
person connection with
in connection with such
such recommendation.
recommendation.

Supplementary Material 2111.05(b)

Supplementary Material 2111.05(b) states
states that
that an
an associated
associated person
person must
must "have
“have aa
reasonable basis
reasonable basis to
to believe
believe that
that the
the recommendation
recommendation is is suitable
suitable for
for aa particular
particular customer
customer based
based
on that
on that customer's
customer’s investment profile, as
investment profile, as delineated
delineated in Rule 2111(a)."
in Rule 2111(a).”

Supplementary Material 2111.01

Supplementary Material 2111.01 links
links the
the obligation
obligation of
of complying with the
complying with the suitability
suitability
rule with
rule with the
the ethical
ethical requirement of fair
requirement of fair dealing.
dealing. It states that
It states that the
the "suitability
“suitability rule
rule is
is fundamental
fundamental
to fair
to dealing and
fair dealing and is
is intended
intended to
to promote
promote ethical sales practices
ethical sales practices and
and high standards of
high standards of
professional conduct.”
professional conduct."

These standards require

These standards require aa registered
registered person,
person, before
before recommending
recommending aa security,
security, to
to analyze
analyze
it in
it relation to
in relation to the
the customer's
customer’s investment profile. In
investment profile. this case,
In this the key
case, the elements of
key elements of the
the five
five
customer profiles
customer profiles were
were age,
age, risk
risk tolerance,
tolerance, investment objectives, financial
investment objectives, situation and
financial situation and needs,
needs,
and investment
and investment experience.
experience.

FINRA has
FINRA has long
long recognized
recognized that that aa customer's
customer’s age
age and
and "life
“life stage
stage .. .. .. are
are important
important
factors to consider
factors to consider in performing aa suitability
in performing suitability analysis,"
analysis,” noting
noting that
that with
with age,
age, investors’ “time
investors' "time
horizons, goals,
horizons, goals, risk tolerance .. .. .. may
risk tolerance may change” and liquidity
change" and “often takes
liquidity "often takes on
on added
added
209
importance.” When they invested, the youngest of the five customers
importance."209 When they invested, the youngest of the five customers was 73 years was 73 years old.
old. The
The
others were
others were in
in their
their 80s,
80s, and
and the
the eldest
eldest was
was 88.
88. Hicks'
Hicks’ repeated
repeated 10-year
10-year or
or more
more estimates
estimates of
of the
the
time horizons
time horizons for their investments
for their investments were were not
not reasonable.
reasonable.

209
2°9 FINRA Regulatory
FINRA Regulatory Notice
Notice 07-43,
07-43, 2007
2007 FINRA
FINRA LEXIS
LEXIS 42,
42, at
at *4-5
*4–5 (Sept.
(Sept. 2007).
2007).

23
23
 None of
None of the
the five
five customers
customers hadhad aa tolerance
tolerance for high-risk investments.
for high-risk investments. Yet
Yet Hicks
Hicks made
made thethe
recommendations even
recommendations though the
even though the REITs
REITs andand BDCA
BDCA were
were all
all high risk. The
high risk. prospectuses all
The prospectuses all
warn that
warn that investors should be
investors should be able
able to
to afford
afford to
to lose their entire
lose their entire investments.
investments. Such
Such
recommendations have been recognized as unsuitable for customers situated
recommendations have been recognized as unsuitable for customers situated similarly similarly to
to the
the five
five
210
here: retired,
here: retired, 73 years old
73 years old and
and older, with conservative
older, with risk investment
conservative risk investment objectives.
objectives.210

Hicks simply
Hicks simply did
did not
not know
know of of or
or pay
pay attention
attention to
to the
the risks
risks the
the prospectuses
prospectuses mademade
abundantly clear.
abundantly clear. He
He did
did not
not even
even review
review the
the prospectuses.
prospectuses. AtAt best,
best, he
he testified,
testified, he
he glanced
glanced atat aa
few pages. When
few pages. When confronted
confronted about
about his
his ignorance
ignorance of of the
the many
many risks
risks the
the prospectuses
prospectuses describe,
describe, he he
disparaged risk
disparaged risk disclosures
disclosures in
in general
general when
when hehe testified
testified that
that every
every prospectus
prospectus he he has
has seen
seen inin his
his
211
long career "usually
long career “usually has
has similar
similar language.” This testimony
language."211 This testimony suggests
suggests that
that Hicks
Hicks "rashly
“rashly
marginalized” the
marginalized" the prospectuses'
prospectuses’ risk
risk warnings
warnings as as "boilerplate
“boilerplate legalese"
legalese” of
of little importance, and
little importance, and
heedlessly substituted
heedlessly substituted his
his own
own judgment
judgment that
that the
the recommendations
recommendations were were not
not high risk. 212
high risk.212

In almost every
In almost every instance,
instance, by
by the
the express
express terms
terms of
of the
the issuers'
issuers’ minimum
minimum suitability
suitability
requirements, and
requirements, and the
the state-required
state-required minimum
minimum suitability
suitability requirements
requirements forfor some,
some, Hicks'
Hicks’
customers did
customers did not
not qualify
qualify to
to make
make the
the investments
investments hehe recommended.
recommended. Although
Although recommending
recommending an an
investment to
investment to aa customer
customer who
who does
does not
not meet
meet state-prescribed
state-prescribed requirements
requirements is is not
not by
by itself
itself aa
violation of
violation of FINRA's
FINRA’s suitability
suitability rule,
rule, FINRA's
FINRA’s National
National Adjudicatory
Adjudicatory Council
Council ("NAC")
(“NAC”) has has held
held
that aa state's
that state’s suitability
suitability standards
standards are
are useful
useful guides
guides toto making
making aa suitability
suitability determination.
determination. 213
Similarly,
Similarly, issuers’ minimum suitability
issuers' minimum suitability requirements put aa "representative
requirements put “representative on notice that
on notice that the
the
issuer has
issuer has flagged
flagged the
the product
product as,
as, for
for example, risky, illiquid,
example, risky, illiquid, oror complex” and aa representative
complex" and representative
214
should take
should take this
this into account. Hicks
into account.214 Hicks did
did not.
not.

Furthermore, for
Furthermore, for three
three customers—MM,
customers—MM, RT, RT, and
and NM—Hicks'
NM—Hicks’ recommendations
recommendations
excessively concentrated
excessively concentrated their
their liquid assets in
liquid assets in high-risk,
high-risk, illiquid
illiquid securities.
securities. The
The SEC has held
SEC has held that
that
aa broker's
broker’s recommendations
recommendations were were unsuitable
unsuitable when
when they
they resulted
resulted inin aa widow
widow inin her
her late
late fifties,
fifties,
with aa modest
with modest income
income and
and net
net worth,
worth, investing
investing significant
significant portions
portions ofof her
her portfolio
portfolio in
in securities
securities
that were
that were too
too risky
risky for her. 215 Similarly,
for her.215 Similarly, the
the NAC
NAC has held that
has held that recommendations
recommendations to to retired
retired
senior investors
senior investors seeking
seeking safe
safe investments
investments that
that excessively
excessively concentrate
concentrate their
their portfolios
portfolios in
in high-
high-
216
risk, illiquid
risk, illiquid securities
securities are
are unsuitable.216
unsuitable.

210
Dep’t
Dep
210 't of
of Enforcement v. Escarcega,
Enforcement v. No. 2012034936005,
Escarcega, No. 2012034936005, 2017
2017 FINRA
FINRA Discip.
Discip. LEXIS 32, at
LEXIS 32, at *54
*54
(NAC July
(NAC July 20,
20, 2017).
2017).
211
Tr.
211 Tr. 295.
295.
212
212Dep’t
Dep't of Enforcement v.
of Enforcement v. Noard, No. 2012034936101,
Noard, No. 2012034936101, 2015
2015 FINRA Discip. LEXIS
FINRA Discip. 29, *8-9
LEXIS 29, *8–9 (OHO
(OHO July
July 17,
17,
2015), aff'd,
2015), 2017 FINRA
aff’d, 2017 FINRA Discip.
Discip. LEXIS
LEXIS 1515 (NAC
(NAC May
May 12,
12, 2017)
2017) (fmding
(finding aa respondent
respondent failed
failed to
to perform
perform aa proper
proper
suitability analysis when
suitability analysis when he
he discounted
discounted the
the numerous
numerous disclosures
disclosures in the offering
in the offering documents
documents for
for aa high-risk,
high-risk, illiquid
illiquid
security that was
security that was appropriate
appropriate only
only for
for investors
investors who
who could
could afford
afford to
to lose
lose their
their entire investment).
entire investment).
213
213 2017 FINRA
Escarcega, 2017
Escarcega, FINRA Discip.
Discip. LEXIS
LEXIS 32,
32, at
at *57
*57 n.33.
n.33.
214
214 2017 FINRA
Noard, 2017
Noard, FINRA Discip.
Discip. LEXIS
LEXIS 15,
15, at
at *20-21.
*20–21.
215
215 Jack H.
Jack H. Stein, Exchange Act
Stein, Exchange Act Release
Release No.
No. 47335,
47335, 2003
2003 SEC
SEC LEXIS 338, at
LEXIS 338, at *9-10,
*9–10, 15
15 (Feb.
(Feb. 10,
10, 2003).
2003).
216
216 2017 FINRA
Escarcega, 2017
Escarcega, FINRA Discip.
Discip. LEXIS
LEXIS 32,
32, at
at *3-4,
*3–4, 45.
45.

24
24
 The testimony and
The testimony and evidence
evidence presented
presented at
at the
the hearing
hearing lead
lead us
us to
to conclude,
conclude, asas we
we
summarize below,
summarize below, that
that Hicks
Hicks failed to comply
failed to comply with
with the
the requirement that he
requirement that he tailor
tailor his
his
recommendations to
recommendations to ensure
ensure they
they were
were suitable
suitable to
to each
each customer's
customer’s financial
financial situation,
situation, needs,
needs, and
and
217
investment objectives.
investment objectives.217

1. Hicks
1. Hicks Made
Made an
an Unsuitable Recommendation of
Unsuitable Recommendation of BDCA
BDCA to
to Customer
Customer TB
TB

The BDCA prospectus

The BDCA prospectus makes
makes clear
clear that
that it
it is
is aa high-risk,
high-risk, long-term
long-term investment.
investment. BDCA's
BDCA’s
suitability section
suitability section specifies
specifies the
the company
company doesdoes not
not sell
sell shares
shares toto North
North Carolina
Carolina residents
residents who
who do
do
not meet
not meet the
the state's
state’s suitability
suitability requirements.
requirements. When
When asked
asked if if he
he knew
knew about
about the
the suitability
suitability
thresholds for
thresholds for North
North Carolina
Carolina residents
residents when
when hehe recommended
recommended BDCA BDCA toto TB, Hicks testified
TB, Hicks testified "I
“I
218
don’t think
don't think II was
was aware."218
aware.” HicksHicks admitted
admitted that
that TB
TB diddid not meet these
not meet these minimum
minimum suitability
suitability
standards. Hicks
standards. Hicks testified
testified that
that he
he relied
relied on his firm's
on his firm’s compliance
compliance department, because it
department, because it was
was
privy to
privy to his
his clients’
clients' financial profiles, to
financial profiles, to determine
determine whether
whether aa customer met an
customer met an offering's
offering’s
suitability requirements.
suitability requirements. Acknowledging
Acknowledging that that "[m]aybe
“[m]aybe it was aa mistake,"
it was mistake,” he
he trusted
trusted his
his firm and
firm and
219
“these wholesalers
"these wholesalers that that sold
sold this junk.”99219
this junk.

TB
TB did not know
did not that the
know that the places
places on
on the
the subscription
subscription form she initialed
form she initialed were
were
acknowledgments that:
acknowledgments that: (i)
(i) she
she met
met her
her state's
state’s suitability
suitability thresholds
thresholds for
for investing
investing in BDCA; (ii)
in BDCA; (ii)
her shares
her shares were
were illiquid;
illiquid; (iii)
(iii) she
she did
did not
not expect
expect to
to be
be able
able to
to sell
sell her
her shares;
shares; and
and (iv)
(iv) if
if she
she did
did
sell them
sell them she
she would
would probably
probably receive
receive less
less than
than she
she paid
paid for
for them.
them. When
When shown
shown the
the first
first page
page of
of
the BDCA
the BDCA prospectus
prospectus describing
describing the
the risks,
risks, Hicks
Hicks said
said he
he "[p]robably"
“[p]robably” diddid not
not read
read it.
it. If
If he
he had,
had,
220
he testified,
he testified, he
he "wouldn't
“wouldn’t havehave invested
invested in
in this
this stuff."22°
stuff.” Unaware
Unaware of of these
these risks, Hicks could
risks, Hicks not
could not
221
explain them
explain them to
to TB.
TB.221

It was not
It was not until
until TB asked Hicks
TB asked Hicks to
to liquidate
liquidate her shares that
her shares that he informed her
he informed her that
that he could
he could
not do
not so.
do so.

We find
We find it relevant that
it relevant that TB did not
TB did meet the
not meet the North
North Carolina
Carolina suitability
suitability requirements, and
requirements, and
that Hicks
that Hicks was
was unaware and therefore
unaware and therefore unable
unable to
to explain that to
explain that to her.
her. Given
Given TB’s
TB's investment
investment
profile, including
profile, including her age, investment
her age, objective, risk
investment objective, tolerance, and
risk tolerance, and her wish to
her wish to have all liquid
have all liquid
investments, we
investments, we conclude that Hicks'
conclude that Hicks’ recommendation
recommendation of BDCA to
of BDCA to TB was unsuitable
TB was unsuitable for
for her
her
and violated
and the requirements
violated the requirements of Rule 2111(a).
of Rule 2111(a). Hicks
Hicks also
also failed to meet
failed to meet the
the suitability
suitability rule's
rule’s
requirement of
requirement fair dealing
of fair and therefore
dealing and therefore failed to abide
failed to abide by
by the
the ethical
ethical sales
sales practices
practices and
and high
high
standards of
standards of professional
professional conduct required by
conduct required by Rule
Rule 2010.
2010.

217
217 Department of
Department of Enforcement
Enforcement v.
v. Newport
Newport Coast No. 2012030564701,2018
Securities, No.
Coast Securities, 2012030564701, 2018 FINRA
FINRA Discip.
Discip. LEXIS
LEXIS 14,
14,
at *141-42
at *141–42 (NAC
(NAC May
May 23,2018),
23, 2018), aff'd, Exchange Act
aff’d, Exchange Act Release
Release No.
No. 88548,2020
88548, 2020 SEC LEXIS 911
SEC LEXIS 911 (Apr.
(Apr. 3,2020).
3, 2020).
218
218 Tr. 212-13.
Tr. 212–13.
219
219 Tr. 216-18.
Tr. 216–18.
220
220 Tr. 210.
Tr. 210.
221
221 Tr. 209-12.
Tr. 209–12.

25
25
 2. Hicks Made
2. Hicks Made Unsuitable Recommendations of
Unsuitable Recommendations of BDCA
BDCA and the Non-Traded
and the Non-Traded
ARC Finance
ARC Finance REIT
REIT to
to Customer
Customer NC
NC

NC did
NC did not
not meet
meet either
either the
the North
North Carolina
Carolina suitability
suitability requirements
requirements for
for state
state residents
residents
investing in
investing in BDCA
BDCA oror ARC
ARC Finance's
Finance’s minimum
minimum suitability
suitability requirements.
requirements. And,
And, based
based on
on NC's
NC’s
age, investment
age, investment objective
objective of
of income,
income, moderate
moderate risk
risk tolerance,
tolerance, liquid
liquid assets
assets and
and annual
annual income,
income,
we find
we find that
that Hicks'
Hicks’ recommendations
recommendations that
that NC
NC invest
invest $27,500
$27,500 in
in shares
shares of
of BDCA
BDCA and and $15,000
$15,000 in
in
ARC Finance
ARC Finance were
were unsuitable.
unsuitable.

Again, Hicks
Again, Hicks was
was unaware
unaware of of the
the risks
risks described
described in
in detail
detail in
in the
the issuers'
issuers’ prospectuses.
prospectuses.
According to
According to Hicks,
Hicks, he
he just
just "glanced
“glanced atat several
several pages"
pages” of
of the
the BDCA prospectus. 222 Hicks
BDCA prospectus.222 Hicks
assumed, incorrectly,
assumed, incorrectly, as
as he
he had
had when
when hehe recommended
recommended BDCABDCA to to TB,
TB, that
that BDCA
BDCA waswas aa REIT.
REIT.
He made
He made the
the assumption,
assumption, hehe said,
said, because
because BDCA
BDCA was was "sold
“sold under
under the
the name
name American
American Realty
Realty
223
Capital,” and
Capital," and to
to him,
him, "Realty
“Realty means
means real
real estate."223
estate.”

Hicks did
Hicks did not
not inform
inform NCNC ofof any
any of
of the
the numerous
numerous risks
risks disclosed
disclosed in
in ARC
ARC Finance's
Finance’s
prospectus, including
prospectus, including the
the risk
risk that
that she
she might
might lose
lose her
her entire
entire investment and the
investment and the company had no
company had no
established sources
established sources of
of financing.
financing. 224

Hicks’ ignorance
Hicks' ignorance of
of the
the risks
risks rendered
rendered him
him incapable
incapable ofof meeting
meeting the
the requirements
requirements of
of Rule
Rule
2111(a) because
2111(a) because hehe could
could not
not have
have aa reasonable
reasonable basis
basis to
to believe
believe that
that these
these recommendations
recommendations
were suitable
were suitable for
for NC
NC based
based on
on her
her investment
investment profile.
profile. Making
Making these
these recommendations,
recommendations, Hicks
Hicks
also failed
also failed to
to comply
comply with
with his
his fundamental
fundamental ethical
ethical obligation
obligation of
of fair
fair dealing.
dealing. Therefore, we
Therefore, we
conclude that Hicks violated Rules 2111(a) and 2010 in making these recommendations
conclude that Hicks violated Rules 2111(a) and 2010 in making these recommendations to to NC.
NC.

3. Hicks
3. Hicks Made
Made Two
Two Unsuitable
Unsuitable Recommendations
Recommendations of
of Non-Traded
Non-Traded ARC
ARC
Retail and
Retail ARC NYC
and ARC NYC REITs
REITs to
to Customer
Customer MM
MM

Hicks concedes
Hicks concedes he
he made
made aa mistake
mistake when
when he
he recommended
recommended illiquid,
illiquid, high-risk
high-risk securities
securities to
to
MM. The
MM. Hearing Panel
The Hearing Panel agrees.
agrees. Investing more than
Investing more than $50,000
$50,000 in
in one
one year
year in
in ARC
ARC Retail
Retail and
and
ARC NYC,
ARC NYC, both
both illiquid
illiquid and
and high
high risk,
risk, was
was clearly
clearly unsuitable
unsuitable for
for MM,
MM, given
given her
her advanced
advanced age,
age,
reasonably foreseeable
reasonably foreseeable need
need for
for liquidity, moderate risk
liquidity, moderate risk tolerance,
tolerance, limited net worth
limited net worth and
and liquid
liquid
assets, and
assets, and investment
investment objectives
objectives that
that included
included income.
income.

Hicks claims
Hicks claims he
he did
did not
not know
know that
that the
the warning
warning inin bold
bold font
font on
on the
the first
first page
page ofof the
the ARC
ARC
Retail prospectus describes the REIT as highly risky, and that investors should be able
Retail prospectus describes the REIT as highly risky, and that investors should be able to affordto afford
the complete
the complete loss of their
loss of their investments.
investments. He
He cannot
cannot recall
recall if
if he
he even
even looked at the
looked at the first
first page
page of
of the
the
prospectus. When
prospectus. When Hicks
Hicks recommended
recommended ARCARC Retail,
Retail, he
he did
did not
not then
then believe
believe it
it was
was aa high-risk
high-risk

222
222 Tr. 205-06.
Tr. 205–06.
223
223 Tr. 208.
Tr. 208.
224
224 Tr. 208-213.
Tr. 208–213.

26
26
investment. Thus,
investment. Thus, he did not
he did tell MM
not tell MM that
that she
she could
could lose all of
lose all of her investment. 225 Hicks
her investment.225 Hicks testified
testified
226
that he
that he believed
believed the
the recommendation was appropriate
recommendation was appropriate at
at the
the time.226
time.

The ARC NYC

The ARC NYC prospectus'
prospectus’ minimum
minimum suitability
suitability threshold
threshold requires investors to
requires investors to have
have
gross annual
gross annual income
income ofof at
at least
least $70,000 and aa minimum
$70,000 and minimum net net worth
worth ofof $70,000, or aa net
$70,000, or worth,
net worth,
exclusive of
exclusive of home,
home, home
home furnishings and cars,
furnishings and cars, of
of no
no less than $250,000.
less than When asked
$250,000. When asked ifif he
he knew
knew
this when
this when he made the
he made the recommendation,
recommendation, Hicks Hicks said he "would
said he “would assume"
assume” that
that he
he did not. He
did not. He
testified it
testified was "a
it was “a mistake"
mistake” on on his part to
his part to have
have MM
MM invest
invest in ARC NYC,
in ARC NYC, based
based on the "false
on the “false
numbers” he
numbers" put in
he put her investment
in her investment profile.
profile. He
He admitted
admitted that
that MM
MM "never
“never had
had an
an annual
annual income
income of
of
$70,000 and
$70,000 and II guess her net
guess her net worth
worth was
was less than 250,000.
less than 250,000. Either
Either II wasn't
wasn’t paying
paying attention
attention oror did
did
227
not realize”
not what the
realize" what the ARC
ARC NYC's
NYC’s minimum
minimum suitability requirements were.227
suitability requirements were.

Hicks’ recommendations
Hicks' recommendations werewere also
also unsuitable
unsuitable because
because they
they resulted
resulted in
in an
an excessive
excessive
concentration of
concentration of MM's
MM’s liquid assets in
liquid assets in illiquid,
illiquid, high-risk
high-risk securities.
securities. The two REIT
The two REIT purchases
purchases
made about
made about 50% of her
50% of her liquid
liquid assets
assets unavailable
unavailable when
when she
she needed
needed them
them and
and impeded
impeded herher ability
ability
to qualify
to qualify for
for Medicaid
Medicaid assistance
assistance to
to enable
enable her
her to
to afford
afford to
to live
live in
in her
her residence
residence at
at aa nursing
nursing
home.
home.

For these
For these reasons,
reasons, wewe conclude
conclude that
that because
because Hicks
Hicks did
did not
not conduct
conduct aa reasonably
reasonably diligent
diligent
review, he
review, he did
did not
not have
have aa reasonable
reasonable basis
basis to
to believe
believe that
that his
his recommendations
recommendations werewere suitable
suitable for
for
MM, and
MM, and therefore
therefore violated
violated FINRA
FINRA Rule
Rule 2111(a).
2111(a). By
By making
making these
these recommendations
recommendations to to MM,
MM,
Hicks also
Hicks also failed
failed to
to fulfill
fulfill his
his obligations
obligations of
of fair
fair dealing,
dealing, and
and violated
violated FINRA
FINRA Rule
Rule 2010.
2010.

4. Hicks
4. Hicks Made
Made Five
Five Unsuitable
Unsuitable Recommendations
Recommendations of
of Non-Traded
Non-Traded REITs
REITs to
to
Customer
Customer RT
RT

After reviewing
After reviewing RT's
RT’s and
and Hicks'
Hicks’ testimony
testimony andand the
the documentary
documentary evidence,
evidence, we
we conclude
conclude
that Hicks'
that Hicks’ recommendations
recommendations that
that RT
RT make
make five investments in
five investments in non-traded
non-traded REITs
REITs were
were
unsuitable, based
unsuitable, based on
on RT's
RT’s age,
age, investment
investment objective
objective ofof capital
capital preservation,
preservation, low risk tolerance,
low risk tolerance,
and the
and the actual
actual amount
amount of
of her
her liquid
liquid assets—far
assets—far less than the
less than the grossly
grossly inflated representations
inflated representations
Hicks made
Hicks made in her account
in her account documents
documents starting
starting in August 2015.
in August 2015.

The prospectuses describe

The prospectuses describe these
these non-traded
non-traded REITs—ARC
REITs—ARC Healthcare,
Healthcare, ARC
ARC Retail,
Retail, and
and
ARC NYC—as
ARC NYC—as investments
investments with
with aa high
high degree
degree of of risk.
risk. When asked why
When asked why he
he recommended
recommended themthem
to RT,
to RT, aa conservative
conservative investor, Hicks testified
investor, Hicks testified it
it was
was because
because hehe "had
“had not
not read"
read” the
the prospectuses,
prospectuses,
at least
at not the
least not the risk disclosures. He
risk disclosures. He testified
testified that
that he
he left that task
left that task to
to the
the compliance
compliance officer
officer at
at
228
Capital Investment. When he made these recommendations, however, he
Capital Investment.228 When he made these recommendations, however, he was working at was working at
Southeast
Southeast Investments,
Investments, notnot Capital
Capital Investment.
Investment.

225
225 Tr. 150-53.
Tr. 150–53.
226
226 Tr. 125-26.
Tr. 125–26.
227
227 Tr. 130-32.
Tr. 130–32.
228
228 Tr. 286.
Tr. 286.

27
27
 Hicks then
Hicks then testified
testified that
that he
he made
made these
these recommendations because his
recommendations because his experiences
experiences atat the
the
“various sales
"various sales conferences"
conferences” sponsored
sponsored by by ARC
ARC led
led him
him to
to trust
trust ARC's
ARC’s compliance
compliance department
department
“to do
"to do the
the dirty
dirty work"
work” of
of due
due diligence
diligence before
before he
he recommended
recommended the the investments.
investments. Had
Had hehe read
read the
the
risk disclosures, Hicks testified, he “[a]bsolutely” would not have recommended
risk disclosures, Hicks testified, he "[a]bsolutely" would not have recommended these REITs tothese REITs to
229
RT. Hicks
RT.229 Hicks admitted
admitted that
that he
he did not have
did not the "slightest
have the “slightest idea” of the
idea" of the risks
risks when
when he made the
he made the
recommendations to
recommendations to RT.
RT. Hicks
Hicks did not inform
did not RT, because
inform RT, because he he did
did not know, that
not know, that she
she did
did not
not
meet the
meet the minimum
minimum suitability
suitability requirements
requirements described
described in
in the
the prospectuses.
prospectuses. He He called this an
called this an
230
“oversight,” and
"oversight," and "poor
“poor judgment."
judgment.” 23°

We also
We also find
find that
that Hicks'
Hicks’ recommendations
recommendations overconcentrated
overconcentrated RT's
RT’s assets
assets in
in high-risk,
high-risk,
illiquid securities.
illiquid securities. After
After her
her fifth investment, RT
fifth investment, RT had
had invested
invested more
more than
than half
half of
of the
the liquid assets
liquid assets
she had
she had before
before making
making the
the investments.
investments. Given
Given her
her investment
investment profile,
profile, this
this was
was clearly
clearly unsuitable
unsuitable
for RT.
for RT.

For these
For these reasons,
reasons, we
we conclude
conclude that
that Hicks
Hicks did
did not
not have
have aa reasonable
reasonable basis
basis to
to believe
believe that
that
his recommendations
his recommendations to to RT
RT were
were suitable
suitable for
for her.
her. By
By his
his recommendations,
recommendations, Hicks
Hicks also
also failed
failed to
to
fulfill his responsibility
fulfill his responsibility to
to deal
deal fairly
fairly with
with RT.
RT. By
By making
making these
these recommendations
recommendations to to RT,
RT, Hicks
Hicks
violated FINRA
violated FINRA Rules
Rules 2111(a)
2111(a) and
and 2010.
2010.

5. Hicks
5. Hicks Made
Made Eight
Eight Unsuitable Recommendations of
Unsuitable Recommendations of Non-Traded
Non-Traded REITs
REITs
to Customer
to Customer NM
NM

In 2012 Customer
In 2012 Customer NMNM had
had variable
variable annuities,
annuities, recommended
recommended by by Hicks,
Hicks, worth
worth more
more than
than
$500,000. Starting in June 2014, when NM
$500,000. Starting in June 2014, when NM was was 81
81 years
years old,
old, through
through July
July 2017,
2017, Hicks
Hicks
recommended eight
recommended investments in
eight investments in six
six different
different non-traded REITs. By
non-traded REITs. By July 2017 NM
July 2017 NM had
had
231
invested $459,272
invested $459,272 in
in non-traded REITs, largely
non-traded REITs,231 largely funded by withdrawals
funded by withdrawals from
from her variable
her variable
annuities. In
annuities. In doing
doing so,
so, NM
NM liquidated
liquidated one
one variable
variable annuity
annuity and
and had
had less
less than
than $4,000
$4,000 in
in the
the
232
other.232
other.

Hicks admits
Hicks admits that,
that, as
as with
with the
the other
other four customers, he
four customers, he did not warn
did not warn NM
NM of the significant
of the significant
risks involved
risks involved in investing in
in investing non-traded REITs,
in non-traded REITs, because
because he
he was
was unaware
unaware of
of them.
them. He
He admits,
admits, as
as
well, that
well, that he did not
he did warn NM
not warn NM ofof the
the risk
risk that
that she
she was
was overconcentrating her assets
overconcentrating her assets in illiquid,
in illiquid,
high-risk securities.
high-risk securities.

The Hearing Panel

The Hearing Panel finds
finds that
that Hicks'
Hicks’ recommendations
recommendations were were unsuitable because he
unsuitable because did not
he did not
understand the
understand the risks
risks they
they entailed,
entailed, could
could not
not inform
inform NM
NM ofof those
those risks,
risks, and
and did not have
did not have aa
reasonable basis to believe the recommendations were suitable for her. They were also unsuitable
reasonable basis to believe the recommendations were suitable for her. They were also unsuitable
because they
because they resulted
resulted in an unreasonable
in an unreasonable concentration
concentration ofof her
her investments
investments in
in illiquid,
illiquid, high risk
high risk
REITs. Even
REITs. Even if we accept
if we accept Hicks'
Hicks’ inflated
inflated estimate that NM
estimate that NM had $800,000 in
had $800,000 in liquid assets, his
liquid assets, his

229
229 Tr. 287-88.
Tr. 287–88.
230
23/3 Tr. 288.
Tr. 288.
231
231 Tr. 631;
Tr. 631; CX-115.
CX-115.
232
232 Tr. 377.
Tr. 377.

28
28
recommendations led
recommendations her to
led her to place
place more
more than
than half of her
half of her liquid assets in
liquid assets in high-risk, illiquid REITs.
high-risk, illiquid REITs.
Hicks failed
Hicks to meet
failed to meet his
his obligations
obligations under
under the
the customer-specific
customer-specific prong
prong of
of the
the suitability
suitability rule,
rule, and
and
failed to deal
failed to fairly with
deal fairly with NM.
NM. For
For these
these reasons,
reasons, Hicks
Hicks violated
violated FINRA
FINRA Rules
Rules 2111(a) and 2010
2111(a) and 2010
by making
by making these
these recommendations
recommendations to to NM.
NM.

B.
B. Hicks Violated
Hicks Violated His
His Reasonable-Basis
Reasonable-Basis Suitability
Suitability Obligations
Obligations

The Complaint’s second

The Complaint's second cause
cause of
of action
action alleges
alleges that
that Hicks
Hicks failed
failed to
to conduct
conduct reasonably
reasonably
diligent investigations
diligent investigations before
before recommending
recommending thethe non-traded
non-traded REITs
REITs and
and BDCA
BDCA andand therefore
therefore
lacked
lacked aa reasonable
reasonable basis
basis to
to recommend
recommend them,
them, in
in violation
violation of
of FINRA
FINRA Rules
Rules 2111
2111 and
and 2010.
2010.

According to
According to Supplementary Material 2111.05(a),
Supplementary Material 2111.05(a), the
the reasonable-basis
reasonable-basis prong
prong of
of the
the
suitability rule
suitability rule requires
requires an
an associated
associated person,
person, before
before making
making an
an investment
investment recommendation,
recommendation, to
to
develop:
develop:

“a reasonable
"a reasonable basis
basis toto believe,
believe, basedbased on on reasonable
reasonable diligence,
diligence, that that the
the
recommendation is
recommendation is suitable
suitable for
for atat least
least some investors. In
some investors. general, what
In general, what constitutes
constitutes
reasonable diligence will vary depending
reasonable diligence will vary depending on, on, among
among other
other things,
things, the
the complexity
complexity
of and
of and risks
risks associated
associated with
with the
the security
security .. .. .. [an]
[an] associated
associated person's
person’s reasonable
reasonable
diligence must
diligence must provide
provide the
the .. .. .. associated
associated person
person with
with an
an understanding
understanding of of the
the
potential risks
potential risks andand rewards
rewards associated
associated with with the
the recommended
recommended security security
.. .. .. .. The
The lack
lack of such an
of such an understanding
understanding when when recommending
recommending aa security
security .. .. .. violates
violates
the suitability
the suitability rule.”
rule."

The
The SEC
SEC has
has long held that
long held that before
before making
making aa recommendation,
recommendation, aa broker
broker must
must investigate
investigate
233
and understand “the potential risks and rewards inherent
and understand "the potential risks and rewards inherent in in that
that recommendation.”
recommendation."233 A
A
registered representative
registered representative cannot shift the
cannot shift the responsibility
responsibility of
of reasonable diligence to
reasonable diligence to aa firm
firm or an
or an
issuer. A
issuer. A registered
registered representative has "an
representative has “an independent
independent obligation” to understand
obligation" to understand the the security
security
recommended. A
recommended. A failure
failure to
to gain
gain an
an understanding
understanding of of the
the recommended
recommended security
security isis aaper
per se
se
violation of
violation of the
the reasonable-basis
reasonable-basis suitability obligations. 234 Relying
suitability obligations.234 Relying on an issuer’s
on an issuer's representatives
representatives
and marketing
and marketing materials
materials and
and visiting
visiting an
an issuer’s office do
issuer's office do not suffice to
not suffice to fulfill the due
fulfill the diligence
due diligence
requirements of
requirements of the
the reasonable-basis
reasonable-basis prong
prong ofof the
the suitability
suitability rule when the
rule when the registered
registered
representative does
representative does not understand the
not understand the recommended
recommended investment’s
investment's features risks. 235
and risks.235
features and

Hicks did
Hicks did not
not conduct
conduct reasonable
reasonable due diligence to
due diligence to assess
assess the
the suitability
suitability of
of BDCA
BDCA and
and the
the
non-traded REITs.
non-traded REITs. He
He did
did not
not know
know that
that BDCA
BDCA waswas aa business
business development
development corporation. He did
corporation. He did
not understand
not what it
understand what invested in.
it invested in. He
He did not understand
did not understand thethe risks of investing
risks of in BDCA.
investing in BDCA.

233
233 F. J.
F. Kaufman &
J. Kaufman & Co., Exchange Act
Co., Exchange Act Release
Release No.
No. 27535,
27535, 1989
1989 SEC LEXIS 2376,
SEC LEXIS 2376, at
at *9
*9 (Dec.
(Dec. 13,
13, 1989).
1989).
234
Richard G.
Richard
234 G. Cody, Exchange Act
Cody, Exchange Act Release
Release No.
No. 64565,
64565, 2011
2011 SEC LEXIS 1862,
SEC LEXIS 1862, at
at *31-34
*31–34 (May
(May 27,
27, 2011),
2011), aff’d,
aff'd,
693 F.3d
693 F.3d 251
251 (1st
(1st Cir.
Cir. 2012).
2012).
235
235 2016 FINRA
McGee, 2016
McGee, Discip. LEXIS
FINRA Discip. LEXIS 33,
33, at
at *59-61.
*59–61.

29
29
Nonetheless, he
Nonetheless, he recommended
recommended it to customers
it to customers TB and NC.
TB and NC. His
His lack
lack of
of understanding when
understanding when
making the
making the recommendations
recommendations violated
violated the
the suitability
suitability rule.
rule.

Similarly, Hicks did

Similarly, Hicks did not
not understand
understand the the risks
risks of
of the
the non-traded
non-traded REITs
REITs he
he recommended
recommended to to
customers NC, MM, RT, and NM. He did not understand that they were high-risk
customers NC, MM, RT, and NM. He did not understand that they were high-risk investments. investments.
Hicks did
Hicks did not
not know that the
know that the prospectuses
prospectuses warn
warn that
that investors
investors should
should be be able
able to
to afford
afford to
to lose
lose
their entire
their entire investments.
investments. He He based
based his
his recommendations
recommendations on on his
his belief
belief the
the REITs
REITs would
would provide
provide
annual income
annual income to to his
his customers
customers atat aa rate
rate of
of six
six percent
percent of
of their
their investments,
investments, without
without
understanding that
understanding that the
the distributions
distributions might
might not
not occur
occur for
for years,
years, or
or at
at all.
all. He
He did
did not
not know
know that
that the
the
issuers were
issuers were permitted
permitted toto pay
pay distributions
distributions from
from any
any source,
source, including
including unlimited
unlimited amounts
amounts from
from
offering proceeds,
offering proceeds, which
which are
are investors'
investors’ principal.
principal.

Hicks’ lack
Hicks' lack of
of understanding
understanding ofof the
the risks
risks establishes,
establishes, asas Supplementary Material
Supplementary Material
2111.05(a) makes
2111.05(a) makes indisputably
indisputably clear,
clear, that
that he
he failed
failed to
to conduct
conduct aa reasonably
reasonably diligent
diligent examination
examination
of the
of the investments
investments he
he recommended,
recommended, andand thus
thus failed
failed to
to fulfill
fulfill his
his reasonable-basis
reasonable-basis suitability
suitability
obligations.
obligations.

Hicks’ claims
Hicks' claims that
that he
he was
was "sold"
“sold” onon these
these investments
investments by by Capital
Capital Investment
Investment andand by
by ARC
ARC
salespersons and
salespersons and that
that he
he relied
relied on
on Capital
Capital Investment
Investment and and Southeast
Southeast Investments
Investments toto conduct
conduct
reasonable due
reasonable due diligence,
diligence, are
are not
not defenses.
defenses. First,
First, relying
relying on on wholesalers
wholesalers and
and others
others representing
representing
the issuers
the issuers is
is insufficient.
insufficient. Relying
Relying onon his
his firm
firm and
and its
its compliance
compliance staff
staff without
without making
making any
any effort
effort
to find
to find out
out what
what they
they did
did to
to assess
assess the
the suitability
suitability ofof the
the REITs
REITs and
and BDCA
BDCA is is also
also insufficient.
insufficient. As
As
Hicks acknowledged
Hicks acknowledged in in his
his testimony,
testimony, the
the due
due diligence
diligence responsibilities
responsibilities of
of the
the suitability
suitability rule
rule rest
rest
on the
on the shoulders
shoulders of of the
the registered
registered representative
representative making
making aa recommendation.
recommendation. Hicks
Hicks had
had aa
responsibility to personally understand the potential risks of the recommendations
responsibility to personally understand the potential risks of the recommendations he made, he made, and,
and,
236
as he
as he admitted,
admitted, hehe "fell
“fell down"
down” when
when he
he left it to
left it to his
his firm.236
firm.

By failing
By to meet
failing to meet his
his reasonable-basis
reasonable-basis suitability
suitability obligations,
obligations, we
we conclude that Hicks
conclude that Hicks
violated FINRA
violated FINRA Rules
Rules 2111
2111 and
and 2010.
2010.

IV.
IV. Sanctions
Sanctions

A.
A. Arguments of
Arguments the Parties
of the Parties

Enforcement
Enforcement urges the Hearing
urges the Hearing Panel
Panel to
to impose
impose aa bar
bar upon
upon Hicks.
Hicks. Enforcement argues
Enforcement argues
that FINRA's
that FINRA’s Sanction
Sanction Guidelines
Guidelines recommend strong consideration
recommend strong consideration ofof aa bar
bar for violating Rule
for violating Rule
237
2111 when
2111 when aggravating
aggravating factors predominate. In
factors predominate.237 In Enforcement’s view, there
Enforcement's view, there are
are multiple
multiple
aggravating factors
aggravating factors and
and no
no mitigating
mitigating factors
factors to
to justify
justify less
less severe sanctions. 238
severe sanctions.238

236
236 Tr. 147.
Tr. 147.
237
237 Enforcement’s Pre-Hr'g
Enforcement's Pre-Hr’g Br.
Br. 32.
32.
238
238 at 33;
Id. at
Id. 33; FINRA
FINRA Sanction Guidelines at
Sanction Guidelines at 95
95 (2020),
(2020), http://www.fmra.orgisanctionguidelines.
http://www.finra.org/sanctionguidelines.

30
30
 Enforcement argues that
Enforcement argues that the
the "most
“most egregious aggravating factor"
egregious aggravating factor” is
is the
the vulnerability
vulnerability of
of
the customers
the customers toto whom
whom Hicks
Hicks made
made hishis unsuitable
unsuitable recommendations
recommendations. Enforcement notes that
Enforcement notes that the
the
customers were
customers were all
all senior
senior investors,
investors, ranging
ranging from
from 73
73 toto 87 years of
87 years of age
age when
when Hicks
Hicks made
made his
his
recommendations, and they were not financially sophisticated. Additional aggravating
recommendations, and they were not financially sophisticated. Additional aggravating factors, factors,
Enforcement argues, include
Enforcement argues, include the
the pattern
pattern and
and number
number of of unsuitable
unsuitable recommendations,
recommendations, the the
approximately three-year
approximately three-year span
span of misconduct, and
of misconduct, and the
the number
number andand size
size of the investments
of the Hicks
investments Hicks
239
recommended. Finally,
recommended.239 Finally, Enforcement argues that
Enforcement argues that aa "highly
“highly aggravating
aggravating factor” is that
factor" is that Hicks
Hicks
failed to accept
failed to accept responsibility,
responsibility, other than commenting
other than commenting in his testimony
in his testimony that
that he
he accepts
accepts some
some
240
responsibility, while
responsibility, while atat the
the same
same time
time blaming
blaming ARC
ARC and and his
his former
former firm, Capital Investment.
firm, Capital Investment.24°

Enforcement also recommends

Enforcement also recommends that
that we
we order
order Hicks
Hicks to
to disgorge
disgorge the
the commissions
commissions he
he
derived from
derived from the
the transactions
transactions resulting
resulting from
from his
his unsuitable
unsuitable recommendations.
recommendations.

In his defense,
In his defense, Hicks
Hicks argued
argued "I
“I think
think II havehave accepted
accepted blame
blame where
where II am
am responsible."
responsible.” He
He
expressed regret
expressed regret that
that he
he "hurt
“hurt people"
people” but
but insisted
insisted he he did
did not
not do
do soso intentionally.
intentionally. He
He admitted
admitted
that he
that he "did
“did not
not read
read these
these prospectus
prospectus pages
pages entirely"
entirely” and
and that
that he
he takes
takes "responsibility
“responsibility for
for
that.” 241 When
that."241 When asked
asked toto comment
comment onon sanctions,
sanctions, HicksHicks stated
stated only,
only, referring
referring to
to his
his customers,
customers, that
that
242
he "would
he “would like
like to
to be
be able
able to
to help
help them
them get
get .. .. .. out
out of
of this
this stuff."242
stuff.”

B.
B. Discussion
Discussion

The
The Sanction
Sanction Guidelines instruct us
Guidelines instruct that the
us that the "overriding
“overriding purpose
purpose of of all
all disciplinary
disciplinary
243
sanctions is
sanctions to remedy
is to remedy misconduct
misconduct and
and protect
protect the
the investing
investing public."243 Sanctions therefore
public.” Sanctions therefore
should be
should be "meaningful
“meaningful andand significant
significant enough
enough toto prevent
prevent and
and discourage future misconduct
discourage future misconduct byby aa
244
respondent and deter others from engaging in similar misconduct.”
respondent and deter others from engaging in similar misconduct."244 For
For making
making unsuitable
unsuitable
recommendations, the
recommendations, the Guidelines
Guidelines recommend
recommend aa fine of $2,500
fine of $2,500 toto $116,000,
$116,000, suspension
suspension inin any
any or
or
245
all capacities
all capacities for
for 10
10 days
days to
to two
two years,
years, and
and disgorgement
disgorgement of of ill-gotten
ill-gotten gains.245
gains. When When aggravating
aggravating
factors predominate, the
factors predominate, the Guidelines
Guidelines recommend
recommend strong
strong consideration
consideration of of aa bar.
bar.

Violations of
Violations of FINRA's
FINRA’s suitability
suitability rule are serious.
rule are serious. The suitability rule
The suitability rule imposes “an
imposes "an
important duty
important duty that
that is
is fundamental
fundamental to
to the
the relationship
relationship between
between registered
registered representatives and
representatives and
246
their customers."246
their customers.” As As we
we have
have noted
noted above,
above, failure
failure to
to meet
meet the
the requirements
requirements of of the
the suitability
suitability
rule before
rule before making
making aa recommendation,
recommendation, byby having
having anan insufficient
insufficient understanding
understanding to to provide
provide aa

239
239 Enforcement’s Pre-Hr'g
Enforcement's Pre-Hr’g Br.
Br. 32.
32.
240
24/3 Tr. 903-05.
Tr. 903–05.
241
241 Tr. 907-08.
Tr. 907–08.
242
242 Tr. 908-09.
Tr. 908–09.
243
243 Guidelines at
Guidelines at 10.
10.
244
' at 2.
Id. at
Id. 2.
245
245 at 95.
Id. at
Id. 95.
246
246 Dep’t
Dep't of Enforcement v.
of Enforcement v. Brookstone Securities, Inc.,
Brookstone Securities, No. 2007011413501,2015
Inc., No. 2007011413501, 2015 FINRA
FINRA Discip.
Discip. LEXIS
LEXIS 3,
3, at
at *128
*128
(NAC Apr.
(NAC Apr. 16,
16, 2015).
2015).

31
31
reasonable basis
reasonable basis for
for it
it and
and inadequately
inadequately assessing
assessing whether
whether it
it is
is appropriate
appropriate for the particular
for the particular
investor, violates
investor, violates the
the suitability
suitability rule and the
rule and the ethical
ethical requirement
requirement toto abide
abide by
by the
the high standards of
high standards of
247
professional conduct
professional conduct required of all
required of all registered
registered representatives.
representatives.247

Hicks clearly
Hicks clearly failed to fulfill
failed to his obligations
fulfill his obligations under
under both
both prongs
prongs of
of the
the suitability
suitability rule with
rule with
the recommendations
the recommendations he made to
he made to all
all five customers to
five customers to invest
invest in
in high-risk, illiquid, non-traded
high-risk, illiquid, non-traded
REITs and
REITs and BDCA.
BDCA. Consequently,
Consequently, he he failed to ensure
failed to ensure that
that his
his recommendations
recommendations were were in
in any
any way
way
248
consistent with
consistent with each
each of
of his customer’s "best
his customer's “best interests
interests and
and financial situation.” Hicks
financial situation."248 Hicks failed
failed to
to
do anything
do anything approximating
approximating an an acceptable
acceptable level of due
level of due diligence.
diligence.

We have
We have no reason to
no reason to dispute Hicks’ claim
dispute Hicks' claim that
that he
he did
did not intend to
not intend to harm
harm any any of
of his
his
customers. When
customers. When Hicks
Hicks testified
testified that
that "maybe
“maybe it it was
was aa mistake"
mistake” toto have
have recommended
recommended BDCA BDCA to to
NC and
NC and TB, but he
TB, but he "did
“did not
not do any of
do any of this
this intentionally,”
intentionally," Enforcement stated "no
Enforcement stated “no one's
one’s
suggesting you
suggesting you did
did it intentionally.” 249 And
it intentionally."249 And TB testified that
TB testified that she
she did
did not
not believe
believe Hicks
Hicks had
had
“deliberately” recommended
"deliberately" recommended "something
“something that
that II was
was going
going to
to lose
lose money
money in.
in. II just
just can't
can’t believe
believe
250
that of
that of [Hicks]
[Hicks].”
."250

However, Hicks'
However, Hicks’ lack
lack ofof intent
intent to
to harm
harm his
his customers
customers is is not
not aa relevant
relevant mitigating
mitigating factor.
factor.
It does not
It does not reduce
reduce the
the weight
weight ofof the
the aggravating
aggravating factor
factor of
of the
the advanced
advanced ages ages of
of the
the customers,
customers,
251
which we
which we must
must consider.251
consider. It It does
does not
not overcome
overcome thethe aggravating
aggravating nature
nature ofof 18
18 unsuitable
unsuitable
recommendations over
recommendations over three
three years
years and
and transactions
transactions totaling
totaling more
more than
than $660,000,
$660,000, which,
which, taken
taken
252
together, establish
together, establish aa clear pattern of
clear pattern of misconduct.
misconduct.252 It does
It does not erase the
not erase the fact that Hicks'
fact that Hicks’
253
misconduct, even
misconduct, if he
even if he did
did not intend it,
not intend it, harmed
harmed his
his customers.
customers.253 TB was
TB was unable
unable to
to liquidate her
liquidate her
shares of
shares of BDCA
BDCA when
when sheshe wished,
wished, andand MMMM and
and NM
NM were
were unable
unable to to liquidate
liquidate and
and recover
recover their
their
principal to afford the care that, at their advanced ages and stages of life, was
principal to afford the care that, at their advanced ages and stages of life, was reasonably reasonably
foreseeable when Hicks
foreseeable when Hicks recommended
recommended illiquidilliquid REITs.
REITs. ItIt does
does not
not rectify
rectify the
the risks
risks of
of the
the
unsuitable overconcentration
unsuitable overconcentration of of MM,
MM, NM,NM, andand RT's
RT’s liquid
liquid assets
assets toto which
which Hicks'
Hicks’
recommendations exposed
recommendations exposed them.
them.

Enforcement argues that

Enforcement argues that Hicks
Hicks acted
acted "at
“at the
the very
very least"
least” recklessly
recklessly by
by making
making his
his
recommendations and
recommendations and that
that his
his misstatements
misstatements ofof customers'
customers’ net
net worth
worth and
and liquid
liquid assets
assets on
on
254
account documents
account documents were
were intentional.254
intentional. As As shown
shown above,
above, Hicks
Hicks made
made varying
varying and
and inaccurate
inaccurate

247
247 2011 SEC
Cody, 2011
Cody, LEXIS 1862,
SEC LEXIS 1862, at
at *26-28.
*26–28.
248
Dep’t of
'Dep't Enforcement v.
of Enforcement v. Siegel, No. C05020055,
Siegel, No. C05020055, 2007
2007 NASD
NASD Discip.
Discip. LEXIS
LEXIS 20,
20, at
at *37
*37 (NAC
(NAC May
May 11,
11, 2007),
2007),
aff’d, Exchange Act
aff'd, Exchange Act Release
Release No.
No. 58737, 2008 SEC
58737, 2008 LEXIS 2459
SEC LEXIS 2459 (Oct.
(Oct. 6,
6, 2008),
2008), aff'd
aff’d in
in relevant part, 592
relevant part, F.2d 147
592 F.2d 147
(D.C. Cir.
(D.C. Cir. 2010).
2010).
249
249 Tr. 217-18.
Tr. 217–18.
250
2513 Tr. 500.
Tr. 500.
251
251 Guidelines at
Guidelines at 8
8 (Principal
(Principal Consideration
Consideration No.
No. 20).
20).
252
252 at 7-8
Id. at
1d. 7–8 (Principal
(Principal Consideration
Consideration Nos.
Nos. 8,
8, 9,
9, 17).
17).
253
253 Id. at
Id. at 77 (Principal
(Principal Consideration
Consideration No.
No. 11).
11).
254
254 Enforcement’s Pre-Hr'g
Enforcement's Pre-Hr’g Br.
Br. 33.
33.

32
32
representations in
representations in their
their account
account documents about the
documents about the financial profiles of
financial profiles of RT,
RT, MM,
MM, and
and NM.
NM. He
He
did so
did so knowingly.
knowingly. In doing so,
In doing so, Hicks
Hicks violated another of
violated another of his obligations under
his obligations under the
the suitability
suitability rule,
rule,
requiring aa registered
requiring registered representative
representative to
to "make
“make recommendations
recommendations only on the
only on the basis
basis of the concrete
of the concrete
information that [the customer supplied] and not on the basis of guesswork as to the
information that [the customer supplied] and not on the basis of guesswork as to the value" ofvalue” of the
the
255
customer’s assets.255
customer's assets. By By making
making recommendations
recommendations ignorant
ignorant of
of the
the risks
risks and
and features
features of
of the
the
securities, and
securities, and by
by groundlessly
groundlessly inflating
inflating representations
representations of
of his
his customers'
customers’ net
net worth
worth and
and liquid
liquid
256
assets, Hicks
assets, Hicks acted
acted recklessly.256
recklessly.

Hicks benefitted
Hicks benefitted from his wrongdoing.
from his wrongdoing. Purchases
Purchases of
of non-traded
non-traded REITs
REITs generated
generated gross
gross
commissions to
commissions to Hicks
Hicks and
and Southeast
Southeast Investments
Investments ofof seven
seven percent
percent of the purchase
of the purchase price.
price. At
At
257
Southeast
Southeast Investments, Hicks received
Investments, Hicks received aa payout
payout ofof 85 percent of
85 percent those commissions.257
of those commissions. From From
2014 through
2014 through July 2017, 62
July 2017, percent of
62 percent of Hicks'
Hicks’ commissions
commissions came
came from
from his
his customers’ purchases
customers' purchases
of non-traded
of non-traded REITs
REITs and BDCA. 258 From
and BDCA.258 From June 2014 through
June 2014 through July
July 2017, the five
2017, the five senior
senior
customers named
customers named inin the
the Complaint
Complaint invested
invested aa total
total of
of $664,955
$664,955 inin non-traded
non-traded REITs
REITs and
and BDCA.
BDCA.
259
From those
From those investments,
investments, Hicks
Hicks netted
netted $38,812
$38,812 inin commissions.259
commissions.

Had Hicks
Had Hicks recommended traded REITs,
recommended traded REITs, he
he would
would not have received
not have received commissions
commissions ofof
260
seven percent
seven percent on their sales.26°
on their sales. If If he
he was
was concerned
concerned about
about his
his customers'
customers’ exposure to the
exposure to the
volatility of
volatility of the
the stock
stock market,
market, he
he could
could have
have offered
offered to
to rebalance
rebalance the
the subaccounts
subaccounts of
of their
their
existing variable
existing variable annuities,
annuities, but
but if
if he
he had,
had, he
he would
would not
not have
have been
been paid
paid any commissions. 261
any commissions.261

We agree
We agree with
with Enforcement
Enforcement that that Hicks'
Hicks’ claim
claim that
that he
he has
has "accepted
“accepted blame
blame where
where II amam
262
responsible” does
responsible"262 does not rise to
not rise to the
the level of aa mitigating
level of mitigating factor. Acceptance of
factor. Acceptance of responsibility
responsibility may may
mitigate when
mitigate when aa respondent acknowledges misconduct
respondent acknowledges misconduct andand accepts
accepts responsibility
responsibility for
for it
it prior
prior to
to
263
detection or the intervention of a regulator.
detection or the intervention of a regulator. 263 As
As Enforcement
Enforcement points out, Hicks did not accept
points out, Hicks did not accept
responsibility or
responsibility or acknowledge
acknowledge his his misconduct
misconduct before
before the
the Complaint
Complaint was
was filed,
filed, or
or when
when he he filed
filed
his Answer,
his Answer, and
and his assertions of
his assertions of personal
personal responsibility at the
responsibility at the hearing
hearing were
were half-hearted
half-hearted andand
included blaming
included blaming ARCARC and
and his
his firms
firms for
for not conducting the
not conducting the due diligence he
due diligence he testified
testified he
he relied
relied
264
on them
on them to
to do.
do.264 Indeed, Hicks
Indeed, Hicks accompanied
accompanied his his explanations for his
explanations for his suitability
suitability rule
rule failures
failures
with argumentative
with argumentative assertions
assertions that
that he
he is
is "not
“not aa compliance officer” 265 and
compliance officer"265 and he
he is “not aa lawyer”
is "not lawyer"

255
255 Eugene J.
Eugene J. Erdos, Exchange Act
Erdos, Exchange Act Release
Release No.
No. 20376,1983
20376, 1983 SEC
SEC LEXIS
LEXIS 332,
332, at
at *7
*7 (Nov.
(Nov. 16,
16, 1983).
1983).
256
256
Guidelines at
Guidelines at 8
8 (Principal
(Principal Consideration
Consideration No.
No. 13).
13).
257
257
Tr. 85–86.
Tr. 85-86.
258
258
CX-45.
CX-45.
259
259
CX-116.
CX-116.
260
268 Tr. 349-50.
Tr. 349–50.
261
261 Tr. 236-37.
Tr. 236–37.
262
262 Tr. 907.
Tr. 907.
263
263 Guidelines at
Guidelines at 77 (Principal
(Principal Consideration
Consideration No.
No. 2).
2).
264
264 Tr. 905.
Tr. 905.
265
265
Tr. 145.
Tr. 145.

33
33
but "a
but salesman.” 266 These
“a salesman."' statements suggest
These statements suggest that
that Hicks
Hicks even now does
even now not appropriately
does not appropriately
recognize and
recognize and accept
accept his
his responsibilities under the
responsibilities under the suitability
suitability rule, and the
rule, and the degree
degree to
to which
which he
he
failed to fulfill
failed to fulfill them.
them.

Taking into consideration

Taking into consideration the
the many
many aggravating
aggravating factors,
factors, and
and the
the absence
absence of
of mitigating
mitigating
circumstances, we
circumstances, we conclude
conclude that
that the
the only
only appropriate
appropriate outcome
outcome with
with the
the potential
potential to
to deter
deter serious
serious
violations of
violations of Rules
Rules 2111
2111 and
and 2010
2010 by
by Hicks
Hicks and
and other
other registered
registered representatives
representatives similarly
similarly
situated is
situated is to
to impose
impose aa bar
bar for
for each
each cause
cause of
of action.
action. Because
Because both
both causes
causes of
of action
action are
are based
based on
on
the same
the same underlying
underlying facts,
facts, we
we conclude
conclude that
that aa single
single bar
bar is
is the
the appropriately
appropriately remedial sanction. 267
remedial sanction.267

As noted
As noted above,
above, Enforcement
Enforcement recommends
recommends thatthat we
we order
order Hicks
Hicks toto disgorge
disgorge the
the
268
commissions he
commissions he earned
earned from
from the
the transactions
transactions he
he recommended.268
recommended. Hicks Hicks profited
profited substantially
substantially
269
from the recommendations.
from the recommendations. His His commissions
commissions totaled
totaled $38,812.60.269
$38,812.60. He He received
received an
an 85 percent
85 percent
payout on
payout on aa seven
seven percent
percent gross
gross commission
commission on on each
each investment.
investment. In
In aa number
number ofof instances
instances Hicks
Hicks
recommended that
recommended that customers
customers fund
fund their
their investments
investments byby withdrawing
withdrawing money
money from
from variable
variable
annuities that
annuities that he
he had
had previously
previously recommended
recommended to to them,
them, on
on which
which he
he had
had already
already been
been paid
paid the
the
commissions. 270
same commissions.27°
same

The Guidelines instruct

The Guidelines instruct that
that when
when aa respondent
respondent obtains
obtains aa financial
financial benefit
benefit from
from the
the
misconduct, to
misconduct, to remediate
remediate that
that misconduct,
misconduct, adjudicators
adjudicators may
may order
order such
such ill-gotten
ill-gotten gains
gains to
to be
be
271
disgorged to
disgorged to FINRA.271
FINRA. We We find that disgorgement
find that is appropriate
disgorgement is appropriate here, and therefore
here, and therefore order Hicks
order Hicks
to disgorge
to disgorge to
to FINRA
FINRA the
the $38,812.60
$38,812.60 that
that he
he received
received in
in commissions
commissions fromfrom his
his unsuitable
unsuitable
recommendations to
recommendations to his
his five senior customers.
five senior customers.

266
266 Tr. 218.
Tr. 218.
267
267 2017 FINRA
Escarcega, 2017
Escarcega, FINRA Discip.
Discip. LEXIS
LEXIS 32,
32, at
at *67
*67 (unitary
(unitary sanction
sanction appropriate
appropriate when
when misconduct
misconduct all
all relates
relates to
to
inappropriate sales of
inappropriate sales of debentures).
debentures).
268
268Enforcement’s Pre-Hr'g
Enforcement's Pre-Hr’g Br.,Br., at
at 32.
32. Enforcement
Enforcement doesdoes not
not recommend
recommend aa restitution order. We
restitution order. agree that
We agree that
restitution is
restitution is unworkable
unworkable here.
here. The
The record
record does
does notnot provide
provide usus with
with aa basis
basis on
on which
which toto calculate monetary losses
calculate monetary losses
suffered by
suffered by the
the customers
customers asas aa result
result of
of Hicks'
Hicks’ recommendations.
recommendations. Customers
Customers TB,TB, NC,
NC, and
and RT
RT have
have been
been unable
unable to
to
recover any
recover any ofof their
their principal
principal invested
invested andand still
still hold
hold shares
shares that
that presumably
presumably have
have some
some value,
value, but
but there
there is
is no
no way
way of
of
knowing how much
knowing how much they
they may
may recover.
recover. WMWM testified
testified that
that he
he was
was able
able to
to recover
recover approximately
approximately $40,000
$40,000 ofof the
the
$50,400
$50,400 MMMM invested. PL testified
invested. PL testified that
that her
her efforts to recover
efforts to recover NM's
NM’s REIT
REIT investments continued more
investments continued more than
than 18
18
months after
months after her
her death,
death, but
but there
there is no evidence
is no evidence howhow much
much ofof her
her principal
principal was
was returned.
returned. Under
Under these
these circumstances,
circumstances,
we are
we are unable
unable to to order
order restitution.
restitution.
269
269 CX-116.
CX-116.
270
270 Tr. 899-900.
Tr. 899–900.
271
271 Guidelines at
Guidelines at 95.
95. When
When FINRA
FINRA collects disgorgement, it
collects disgorgement, routinely contributes
it routinely what is
contributes what is collected to the
collected to the FINRA
FINRA
Investor Education Foundation.
Investor Education Foundation. Id. at 55 (General
Id. at (General Principles
Principles No.
No. 6).
6).

34
34
V.
V. Order
Order

For making
For making unsuitable
unsuitable recommendations
recommendations to to five
five senior
senior customers
customers in
in violation
violation ofof FINRA
FINRA
Rules 2111 and 2010, as alleged in the first cause of the Complaint, and for lacking
Rules 2111 and 2010, as alleged in the first cause of the Complaint, and for lacking a reasonablea reasonable
basis to
basis to recommend
recommend investment
investment in non-traded REITs
in non-traded REITs and and BDCA
BDCA in in violation
violation of
of FINRA
FINRA Rules
Rules
2111 and
2111 and 2010,
2010, as
as alleged
alleged inin the
the second
second cause
cause of
of the
the Complaint,
Complaint, Respondent
Respondent Mercer
Mercer Hicks
Hicks III
III is
is
barred from
barred associating with
from associating with any
any FINRA
FINRA member
member firm in any
firm in any capacity.
capacity. He
He is also ordered
is also ordered toto
disgorge $38,812.60
disgorge $38,812.60 inin ill-gotten
ill-gotten gains to FINRA,
gains to FINRA, and and pay
pay $7,636.25
$7,636.25 for the costs
for the costs of
of this
this
proceeding, which
proceeding, which includes
includes an an administrative
administrative fee of $750
fee of $750 and
and $6,886.25
$6,886.25 for the hearing
for the hearing
transcript.
transcript.

The bar shall

The bar shall become
become effective
effective immediately
immediately if if this
this decision
decision becomes
becomes FINRA's
FINRA’s final
final
action in
action this disciplinary
in this disciplinary proceeding.
proceeding. The
The disgorgement
disgorgement andand costs
costs shall
shall be
be due on aa date
due on date set
set by
by
FINRA, but
FINRA, but not
not sooner
sooner than
than 30
30 days after this
days after this decision becomes FINRA's
decision becomes FINRA’s final
final action
action in this
in this
272
disciplinary proceeding.272
disciplinary proceeding.

Matthew Campbell
Matthew Campbell
Hearing Officer
Hearing Officer
For the
For the Extended
Extended Hearing
Hearing Panel
Panel

Copies to:
Copies to:

Mercer Hicks
Mercer Hicks III (via email,
III (via email, first-class mail, and
first-class mail, and overnight
overnight mail)
mail)
Payne L.
Payne L. Templeton, Esq. (via
Templeton, Esq. (via email)
email)
Michael Perkins
Michael Perkins Esq.
Esq. (via
(via email)
email)
Matthew Minerva,
Matthew Minerva, Esq. (via email)
Esq. (via email)
Kay Lackey,
Kay Lackey, Esq.
Esq. (via
(via email)
email)
Jennifer
Jennifer L. Crawford, Esq.
L. Crawford, Esq. (via
(via email)
email)

272
272 The Panel
The Panel considered
considered and rejected without
and rejected without discussion all other
discussion all other arguments
arguments by
by the
the parties.
parties.

35
35