More On Legal & Compliancefrom The Advisor's Professional Library
- Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation. Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.
- 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.
A Securities and Exchange Commission Inspector General report released Tuesday alleged that the agency’s former general counsel, David Becker, benefited personally by participating in matters related to the liquidation proceedings dealing with the Bernie Madoff fraud.
H. David Kotz, the SEC’s IG, said in his report that Becker “participated personally and substantially” in particular matters in which he had a personal financial interest because his mother’s estate included an account managed by Madoff.
The matters on which Becker advised “could have directly impacted his financial position,” the IG’s report said.
Irving Picard, trustee for the liquidation of Madoff’s firm, filed a suit in February against Becker and his two brothers as part of his efforts to regain “claw back” funds from investors who gained from the Madoff Ponzi scheme. Becker earned more than $1.5 million from a Madoff account held in his mother’s estate.
SEC Chairman Mary Schapiro (left) released a statement the same day in which she said that after hearing about the Trustee’s suit against Becker, she asked the agency’s IG in March to investigate any conflicts of interest arising from the participation of Becker in determining the SEC’s position in the liquidation proceeding brought by the Securities Investor Protection Corporation (SIPC) of Bernard L. Madoff Investment Securities, LLC (BMIS).
Said Schapiro on Tuesday: “I take [the IG’s] report, which was published today, very seriously.”
The SEC’s IG, H. David Kotz, says that, after extensive investigation, his office found that “Becker played a significant and leading role in the determination of what recommendation the [SEC] staff would make to the Commission regarding the position the SEC would advocate as to the determination of a customer’s net equity in the Madoff Liquidation.”
Said Kotz in his report: Under the Securities Investor Protection Act of 1970 (SIPA), where SIPC has initiated the liquidation of a brokerage firm, net equity is the amount that a customer can claim to recover in the liquidation proceeding. "The method for determining the Madoff customer's net equity was, therefore, critical to determining the amount the Trustee would pay to customers in the Madoff Liquidation," Kotz said.
Kotz said that the IG office is referring the findings of its investigation to the Justice Department. Schapiro noted in the statement that it “would be inappropriate for me to comment on the Inspector General’s referral to the Department of Justice.” However, she said, “I do want to state that I’ve known David [Becker] for many years to be a talented, highly skilled lawyer and a dedicated civil servant who served under three Chairmen.”
Specifically, Kotz stated, the issues that should be referred to the Department of Justice for consideration are:
- Mr. Becker’s work as General Counsel on the policy determination of the calculation of net equity in connection with clawback actions stemming from the Madoff matter, and
- Mr. Becker’s SEC work on the proposed legislation affecting clawbacks.
Kotz also recommended that the SEC seek another vote of the Commission on the question of the SEC’s position on the valuation of Madoff victim accounts, which Schapiro said the agency will do. Schapiro also said the SEC will implement Kotz’s other recommendations, which are:
(1) The SEC Ethics Counsel should report directly to the Chairman, rather than to the General Counsel.
(2) The SEC Ethics Office should take all necessary steps, including the implementation of appropriate policies and procedures, to ensure that all advice provided by the Ethics Office is well-reasoned, complete, objective, and consistent, and that Ethics officials ensure that they have all the necessary information in order to properly determine if an employee's proposed actions may violate rules or statutes or create an appearance of impropriety.
(3) The SEC Ethics Office should take all necessary actions to ensure that all ethics advice provided in significant matters, such as those involving financial conflict of interest, are documented in an appropriate and consistent manner.
Two House Financial Services subcommittees will hold a joint hearing on Thursday, Sept. 22, to examine the IG report and the SEC’s handling of potential conflicts of interest involving Becker. The joint hearing will be held by the Financial Services Committee’s Oversight and Investigations Subcommittee and the Oversight and Government Reform Committee’s TARP, Financial Services, and Bailouts of the Public and Private Programs Subcommittee.
“The Inspector General’s finding that Mr. Becker played a ‘significant and leading role’ in matters that directly affected his personal financial interest, and the decision to refer these findings to the Department of Justice, confirms the concerns the Oversight Committee raised last February,” said Oversight Committee Chairman Darrell Issa. “This adds to the SEC’s long list of failures in the Madoff ponzi scheme and casts continued doubt about the direction the agency is headed.”
The hearing, entitled “Potential Conflicts of Interest at the SEC: The Becker Case,” will also review what safeguards are in place at the SEC to avoid conflicts of interest.