More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
Following is a roundup of recent regulatory actions by SEC and FINRA.
SEC Charges Stifel, Nicolaus and Former Executive With Fraud in Sale of CDO-Linked Notes
The SEC on August 10 charged St. Louis-based brokerage firm Stifel, Nicolaus & Co. and former Stifel Senior VP David Noack with defrauding five Wisconsin school districts by selling them what the SEC charged were “unsuitably risky and complex investments funded largely with borrowed money.”
In the complaint, filed in federal court in Milwaukee, the SEC alleges that Stifel and Noack created a proprietary program to help the school districts fund retiree benefits by investing in notes linked to the performance of synthetic collateralized debt obligations (CDOs).
The SEC charges that Stifel and Noack misrepresented the risk of the investments and failed to disclose material facts to the school districts. In the end, according to the SEC, “the investments were a complete failure, but generated significant fees for Stifel and Noack.” Robert Khuzami, director of the SEC’s Division of Enforcement, said in a statement that the charge should be “a teaching moment for sellers of complex financial products.”
FINRA Fines Citigroup $500,000, Saying Sales Assistant Preyed on Elderly, Misappropriating Funds
FINRA announced August 9 that it had fined Citigroup Global Markets Inc. $500,000 for failure to supervise a former registered sales assistant in its branch office in Palo Alto, Calif.
Tamara Moon was suspended in August for allegedly misappropriating $749,978 from the accounts of 22 elderly and ill clients, falsifying account records and engaging in unauthorized trades within client accounts. Citibank neither affirmed nor denied the charges in concluding the settlement, but consented to the entry of FINRA's findings.
According to FINRA, Moon took advantage of supervisory lapses to siphon off funds from the accounts of vulnerable clients and even her own father. FINRA is still investigating individuals involved in her supervision, and said that numerous red flags should have resulted in further inquiries. Those inquiries, it said, would have revealed what Moon was doing.
SEC Charges Former Investment Fund Employee With Insider Trading in Marvel Stock Prior to Disney Deal
On August 11, the SEC charged Toby Scammell, who the agency says worked at an investment fund in 2009, with insider trading that generated a 3,000% profit based on confidential information that he
The SEC alleges Scammell secretly used money in his brother’s accounts over which he had been given control when his brother was deployed to serve in Iraq to purchase the Marvel securities, though he did so without informing his brother or girlfriend.
According to the complaint filed in U.S. District Court for the Central District of California, “Scammell’s girlfriend worked on the Marvel acquisition as an extern in Disney’s corporate strategy department, and she possessed confidential details about the pricing and timing of the deal. Scammell illegally traded on this non-public information in breach of his duty of trust and confidence to his girlfriend. Marvel’s stock price jumped more than 25 percent after the Aug. 31, 2009, public announcement, and Scammell then sold all of his Marvel options.”
In a statement, Rosalind Tyson, director of the SEC’s Los Angeles regional office, said “Scammell exploited his romantic relationship for a financial windfall. His misuse of confidential information gave him an unfair and illegal edge over other traders in the markets.”
Scammell has disputed the charges in a scathing attack on the SEC’s capabilities (or lack thereof) on a Tumblr page.
SEC Settles Enforcement Case for $850,000 With Janney Montgomery Scott
The SEC in July settled an enforcement case against Janney Montgomery Scott and assessed an $850,000 penalty for Janney’s failure to adequately establish, maintain and enforce compliance policies and procedures reasonably designed, taking into consideration the nature of its business, to prevent the misuse of material, nonpublic information.
Patrick Burns (above) of The Law Offices of Patrick J. Burns, commenting on the case, notes that while it was brought as a broker-dealer case, the penalty assessed against Janney should serve as a warning to investment advisors as well, that a firm's compliance policies and procedures must be carefully tailored to the firm's business practices, well maintained and effectively carried out.
In a summary provided by Burns, the SEC had charged that from at least January 2005 through July 2009, Janney had first distributed separate written policies and procedures for its Equity Capital Markets (ECM) division, which oversaw its equity sales, trading, syndicate and research. Those policies and procedures known as the ECM Compliance and Supervisory Manual also governed Janney’s Investment Banking group, which is part of the Capital Markets division. As late as July 2009, parts of the ECM Manual, as posted for the use of Janney’s employees, were incomplete.
The summary further states that the SEC charged that Janney’s implementation of its policies and procedures was deficient in a number of ways. In some instances, Janney did not enforce the policies and procedures in the ECM Manual and therefore, employees and managers did not understand their responsibilities or what policies were actually in place. In other instances, Janney did not follow the policies and procedures as written. These failures, the SEC charged, led to inadequate implementation and enforcement of the firm’s written compliance policies and procedures.