More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
As the SEC's investigation of the auction rate securities (ARS) market continues, the Commission on February 5 announced a settlement with Wachovia Securities LLC that will provide more than $7 billion in liquidity to thousands of customers who invested in ARS before the market for those securities collapsed.
The settlement resolves the SEC's charges that Wachovia, headquartered in St. Louis, misled investors regarding the liquidity risks associated with ARS that it underwrote, marketed and sold. "The Enforcement Division negotiated unprecedented settlements-in-principle with a number of broker/dealer firms, including Wachovia," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement, in a statement.
Merri Jo Gillette, Director of the SEC's Chicago Regional Office, said in the statement that, "Wachovia did not ensure that its sales force understood the ARS products it was selling. As a result, Wachovia's customers were not adequately informed of the nature and risks associated with ARS and were caught holding illiquid securities when the ARS market froze."
The SEC's complaint, filed in the U.S. District Court for the Northern District of Illinois, alleges that Wachovia and A.G. Edwards & Sons, Inc., whose broker/dealer operations were consolidated into Wachovia on January 1, 2008, misrepresented to customers that ARS were safe, highly liquid investments that were comparable to cash or money market instruments. According to the SEC's complaint, "Wachovia reinforced the perception of liquidity by routinely purchasing ARS from A.G. Edwards' customers between auctions, without telling customers that Wachovia's willingness to do so depended upon the continued success of the auctions."
The SEC's complaint also alleges that Wachovia became aware of mounting evidence in late 2007 and early 2008 that put the firm on notice that the risk of auction failures had materially increased. Wachovia, nevertheless, continued to market ARS to its customers as highly liquid investments. On February 14, 2008, the SEC states that Wachovia followed the lead of other broker/dealers and decided to stop supporting auctions. Without broker/dealer support, ARS auctions failed and thousands of Wachovia's customers were left holding billions of dollars in illiquid ARS, without any practical means of redeeming, selling or deriving value from them.
Without admitting or denying the SEC's allegations, the Commission says that Wachovia agreed to be permanently enjoined from violations of Section 15(c) of the Securities Exchange Act of 1934, the broker/dealer fraud provision, and to comply with a number of undertakings, some of which are set forth below. After Wachovia has completed its obligations under the settlement agreement, the SEC says it will decide whether to seek a financial penalty.
The settlement, which is subject to court approval, provides, among other things, that:
- Wachovia will offer to buy back ARS from all investors who purchased ARS from Wachovia into accounts maintained at Wachovia on or before Feb. 13, 2008. Wachovia's buyback has two phases. In the first phase, which ended on Nov. 28, 2008, Wachovia offered to purchase ARS held by natural persons, not-for-profit and religious organizations and for other accounts with account values or household values up to $10 million. As of November 28, it purchased more than $6.2 billion of eligible ARS from customers. Second, beginning no later than June 10 and ending no later than June 30, 2009, Wachovia will offer to purchase ARS held by all other investors.
- Wachovia will pay customers who sold their ARS below par between Feb. 13, 2008, and Nov. 10, 2008, the difference between par and the sale price of the ARS, plus reasonable interest.
- Wachovia will compensate customers who took out loans from Wachovia after Feb. 13, 2008, because of liquidity concerns by reimbursing customers for no less than the negative carry associated with any such loans.
- Wachovia will offer to lend its customers the full par value of their ARS, pending the contemplated buyback, with interest rates set so that customers will have no negative carry on their loans.
- Further, if eligible customers incurred consequential damages because of the illiquidity of their ARS, they may participate in special Financial Industry Regulatory Authority (FINRA) arbitrations.
The SEC added that Wachovia Capital Markets LLC, an affiliate of Wachovia, has voluntarily agreed to provide identical remedial relief to Wachovia Capital customers who purchased ARS in Wachovia Capital accounts.