More On Legal & Compliancefrom The Advisor's Professional Library
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
In the latest investigation of the troubled auction-rate securities market, the Securities and Exchange Commission's Division of Enforcement announced August 7 a preliminary settlement in principle with Citigroup Global Markets, Inc. (Citi) including proposed charges and a plan that would give individual investors, small businesses, and charities all $7.5 billion of their money back from auction-rate securities (ARS) they purchased from the firm.
The agreement, the SEC says, also would require "Citi to use its best efforts to liquidate by the end of 2009 all of the approximately $12 billion worth of ARS the firm sold to retirement plans and other institutional investors."
As the SEC notes in its release announcing the preliminary settlement, the ARS market collapsed in mid-February 2008, leaving tens of thousands of Citi customers holding nearly $20 billion of these illiquid securities for an indefinite period of time. "The conduct underlying the proposed charges stems from Citi's marketing of ARS to many of its customers as highly liquid investments, including as money market investments," the SEC release states. "The liquidity of these securities, however, was premised on Citi providing support bids for auctions it managed when there was not enough customer demand. When Citi stopped supporting auctions in February 2008, there were widespread auction failures. As a result, thousands of Citi customers were left holding illiquid securities."
Linda Chatman Thomsen, Director of the SEC's Division of Enforcement, said in the release, "Today's agreement in principle provides real relief to investors. In a short period of time, about 38,000 individual, small business, and charitable organization investor accounts will receive nearly $7.5 billion in liquidity, and Citi will begin the process of restoring liquidity to over 2,600 institutional investors who hold approximately $12 billion in auction rate securities. This settlement in principle is an outstanding example of federal and state regulatory cooperation for the benefit of investors and markets."