More On Legal & Compliancefrom The Advisor's Professional Library
- Using Solicitors to Attract Clients Rule 206(4)-3 under the Investment Advisors Act establishes requirements governing cash payments to solicitors. The rule permits payment of cash referral fees to individuals and companies recommending clients to an RIA, but requires four conditions are first satisfied.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
Members of the Senate Banking, Housing, and Urban Affairs Committee questioned the Securities and Exchange Commission's (SEC) Inspector General (IG) on Wednesday regarding the IG's report which found that it took the securities regulator 12 years to finally put a stop to Robert Stanford's $8 billion Ponzi scheme.
As Senate Banking Committee Chairman Christopher Dodd, D-Conn., noted in his opening remarks at the hearing, SEC staff found "strong evidence" in 1997 that Stanford Financial Group was likely operating a Ponzi scheme, but the SEC did not bring charges against Stanford until 2009--just months after Bernie Madoff's Ponzi scheme was exposed. Both cases, Dodd said, "revealed deeply troubling failures by the SEC."
While last year's two congressional hearings surrounding the SEC's failures in the Madoff case resulted in reforms being included in the Dodd-Frank Act, Dodd stated at the hearing that failures at the Commission that were exposed in the Stanford case might require further legislative remedies. "There are some areas [regarding SEC practices] that we didn't cover [in Dodd-Frank] that may warrant legislative action," he said.
"The Dodd-Frank bill was one step in a long journey to righting this ship--giving the SEC more power, doubling its funding over five years, and having periodic GAO reviews--but our work is not done," Dodd said in his opening remarks. "The Inspector General's report also makes several thoughtful recommendations regarding bringing enforcement actions in complex cases, evaluating the performance of enforcement staff, coordination among SEC offices and divisions, staff training, and other matters."
What the IG's report revealed was that the enforcement division in the SEC's Fort Worth, Texas, regional office repeatedly ignored warnings from examiners in the Fort Worth office that the certificates of deposit (CDs) that Stanford was promoting could not be legitimate, and that the returns on those CDs could not be legitimate. "We seem to have an instance in which one side of the agency was screaming that there was a fire, and the other side said that the fire was too hard to put out," Dodd said.
David Kotz, the SEC's Inspector General, told members of the Committee that the IG's investigation revealed that the SEC's Forth Worth office was aware since 1997 that Stanford was conducting a Ponzi scheme. However, when questioned by Dodd if the SEC's Washington office was privy to what the Fort Worth office examiners knew about Stanford, Kotz's replied that "there's no evidence that the [SEC's] D.C. office knew of the [Stanford] examinations."
Kotz went on to say that the Fort Worth office thought it was being graded by SEC headquarters in Washington "on how many cases were being brought...So many of the cases that were brought were minor cases; Stanford would have taken a long time to get a case." The Fort Worth office, he said, in essence "didn't want to take up a complicated case."
What's more troubling is the fact that the Fort Worth office's former enforcement head "played a significant role in multiple decisions over the years to quash investigations of Mr. Stanford," Dodd said.
Robert Khuzami, director of the SEC's Division of Enforcement, and Carlo Di Florio, director of the SEC's Office of Compliance Inspections and Examinations (OCIE), told the Committee in their testimony that while they both "deeply regret" the SEC's failure to act in the Stanford case, they have both made a "top to bottom review" of their divisions over the last year and a half to address the recommendations in the IG's report.
Khuzami and Di Florio told the Committee that they have:
Vastly expanded our training programs; hired staff with new skill sets; streamlined management; put seasoned investigative attorneys back on the front lines; improved our examiners' risk-assessment techniques; revised our enforcement and examination procedures to improve coordination and information-sharing; leveraged the knowledge of third parties; instituted new initiatives to identify fraud; and revamped the way that we handle the tremendous volume of tips, complaints, and referrals that we receive annually.