More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
After finding that Morgan Keegan, a unit of Regions Financial, failed to do sufficient due diligence on a hedge fund that was a feeder fund for Bernard L. Madoff Securities, a Financial Industry Regulatory Authority (FINRA) arbitration panel has ordered the firm to pay a Florida couple more than $250,000.
Reuters reported that Morgan Keegan’s clients, Jeffrey and Marisel Lieberman, put the entire value of their account, $200,000, into the hedge fund, Greenwich Sentry LP. The fund filed for bankruptcy in November of 2010. The panel said that, according to Morgan Keegan’s own compliance rules, clients should never be invested in hedge funds unless they have listed “speculation” as one of their primary objectives. The Liebermans had listed that as their last investment objective. The panel also said that the firm had not done much due diligence, never requesting an audited report from Madoff’s firm or even searching the Internet for information about the fund.
The panel wrote, "There is clear and convincing evidence that ... Morgan Keegan was grossly negligent in not performing substantial due diligence and as a result it fraudulently misrepresented the risk of this investment." It ordered the company to pay not only the full $200,000, but also 6% annual interest from the investment date in May of 2007, as well as $50,000 in punitive damages and $14,000 in expert witness fees.
A Morgan Keegan spokesperson said, when asked for comment, "We disagree with the panel's finding in this case and plan to appeal the award."
The Liebermans’ advisor was cleared of wrongdoing by the panel, which found that he was unaware of the lack of due diligence done by the firm and thus did not know that the information he gave his clients about the fund was misleading.
Morgan Keegan, according to the report, has been involved in hundreds of arbitrations over the past year from clients invested in mutual funds that had lost more than 50% in value thanks to subprime mortgage exposure.