More On Legal & Compliancefrom The Advisor's Professional Library
- Regulatory Oversight of Investment Advisors Although the regulatory environment is in a state of flux, it is imperative that RIAs adhere to their compliance obligations. To ensure compliance, RIAs and IARs must fully understand what those obligations are.
- 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.
The Securities and Exchange Commission (SEC) on Thursday charged two State Street Bank and Trust employees with "misleading investors about their exposure to subprime investments," according to an SEC announcement.
The announcement states that the two employees, "John P. Flannery and James D. Hopkins marketed State Street's Limited Duration Bond Fund as an 'enhanced cash' investment strategy that was an alternative to a money market fund."
"Hopkins and Flannery misled State Street's investors about the risks and credit quality of a fund concentrated in subprime bonds and other subprime investments," stated the SEC's Director of the Division of Enforcement, Robert Khuzami.
The SEC alleges that even though as of 2007 "the fund was almost entirely invested in subprime residential mortgage-backed securities and derivatives," it was still "described as less risky than a typical money market fund and the extent of its concentration in subprime investments was not disclosed to investors."
The Division also alleges that State Street's corporate parent's "pension plan" and "internal advisory group" clients were advised to redeem shares in that fund and related funds. It also alleges that the bond fund raised cash by selling the most liquid of the fund's assets to pay off those advisory client's redemptions, leaving the less liquid holdings in the fund for the rest of the investors.
The SEC's charges state that: "The effect of this course of business and these misrepresentations was to cause the misled investors to continue to purchase or continue to hold their investments in these funds. As a result of State Street's and the Respondents' conduct, investors in State Street's funds lost hundreds of millions of dollars during the subprime market meltdown in mid-2007."