More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- 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.
Three high-profile firms have been slapped by three regulatory entities with fines and arbitration awards relating to hedge funds during the financial crisis (FINRA on Merrill Clearing), municipal bond reinvestment transactions (the SEC on JP Morgan) and an interim award for alleged breach of fiduciary duty on an individual investor (a private arbitration panel on Fisher Investments.)
FINRA and Merrill Lynch
A FINRA arbitration panel ordered Merrill Lynch Professional Clearing (now part of BAC) to pay more than $63.7 million to Rosen Capital Partners, a hedge-fund group, as compensation for losses incurred during the 2008 financial crisis, according to an award document released by FINRA on Tuesday.
The Los Angeles-based panel found Merrill’s clearing unit liable for about $63.7 million in compensatory damages as well as 9% interest accruing from Oct. 7, 2008 – representing about $15.5 million. Punitive damages were denied, but the amount of the compensatory damages makes it one of the largest ever awards granted by FINRA arbitrators, the self-regulatory body says.
Rosen had alleged damages caused by "unexpected margin calls" and sought punitive damages for what it said was a breach of contract, fraud and negligence on the part of Merrill.
“We strongly disagree with the arbitration panel’s award, which is contrary to the facts presented,” Merrill Lynch spokesperson William Halldin said in a statement. “At all times, we met the contractual requirements of our relationship with this sophisticated hedge fund, which sought to blame us for losses during a period of extreme market volatility in October 2008. We are considering additional action in this matter, including asking a court to overturn this award.”
SEC and JP Morgan
The Securities and Exchange Commission announced Thursday that it had charged J.P. Morgan Securities (JPMS) with “fraudulently rigging at least 93 municipal bond reinvestment transactions in 31 states, generating millions of dollars in ill-gotten gains.” The SEC said that to settle the SEC’s fraud charges, JPMS agreed to pay approximately $51.2 million that will be returned to the affected municipalities or conduit borrowers. JPMS and its affiliates also agreed to pay $177 million to settle parallel charges brought by other federal and state authorities.
According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, the company, acting as the agent for its affiliated commercial bank, JPMorgan Chase Bank (JPM), at times won bids because it obtained information from the bidding agents about competing bids, a practice known as “last looks.” In other instances, it won bids set up in advance for JPMS to win because the bidding agent deliberately obtained nonwinning bids from other providers, and it facilitated bids rigged for others to win by deliberately submitting nonwinning bids.
“JPMS improperly won bids by entering into secret arrangements with bidding agents to get an illegal 'last look' at competitors’ bids,” Robert Khuzami, director of the SEC's Division of Enforcement, said in the statement. “Municipal issuers and investors didn't stand a chance against the fraudulent strategies JPMS and others used to guarantee profits."
Without admitting or denying the allegations in the SEC’s complaint, JPMS consented to the entry of a final judgment under the Securities Exchange Act of 1934 and has agreed to pay a penalty of $32.5 million and surrender $11.1 million with prejudgment interest of $7.6 million. The settlement is subject to court approval.
In a related matter, the SEC barred former JPMS vice president and marketer James Hertz from “association with any broker, dealer, investment advisor, municipal securities dealer, municipal advisor, transfer agent or nationally recognized statistical rating organization, and from participating in any penny stock offering.” The sanction is based on Hertz’s Dec. 6, 2010, guilty plea to two counts of conspiracy and one count of wire fraud for engaging in misconduct in connection with the competitive bidding process involving the investment of proceeds of tax-exempt municipal bonds.
JAMS and Fisher Investments
Bloomberg said Friday that Fisher Investments Inc., the Woodside, Calif.-based RIA run by advisor and Forbes columnist Kenneth Fisher, may have to pay damages of
$376,075 for breach of fiduciary duty, according to a copy of the interim arbitration award document.
The copy of the document, obtained by Bloomberg, reportedly claims a retired investor is “entitled to out-of-pocket losses she incurred as a result of Fisher Investments liquidating her bond portfolio and investing 100 percent of the proceeds in stocks.”
Fisher’s firm, one of the country’s largest RIAs, manages $41.3 billion in 38,521 customer accounts, according to its Form ADV filing with the SEC.
The news service reports that Sharyn Silverstein, 64, had invested with Fisher Investments in 2007 “after multiple calls and visits from a Fisher outside salesman. She had initially contacted the firm after seeing a Fisher advertisement for a complimentary book in USA Today.”
“She called Fisher to get a copy of a free book, with no intention of doing business with Fisher, and ended up being pressured and eventually persuaded, despite significant resistance on her part and that of her husband, to turn over all of her fixed-income securities to Fisher to be invested in equities,” Karen Willcutts, the JAMS arbitrator for the case, wrote in a 25-page interim award dated July 5, according to Bloomberg.
JAMS is a private arbitration company based in Irvine, Calif., that calls itself "the largest private alternative dispute resolution (ADR) provider in the world."
“The decision was completely wrong on the law and the facts,” David Eckerly, group vice president of corporate communications for Fisher Investments, said in a statement to AdvisorOne. “With more than 25,000 clients, losing arbitration once every seven years is a record far better than any major competitor, which underscores the integrity of our firm.”
Bloomberg notes that in addition to the $376,075 in out-of-pocket damages, “Silverstein may be awarded the costs of her attorney’s fees and other expenses and interest.”