More On Legal & Compliancefrom The Advisor's Professional Library
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
- 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.
Rep. Scott Garrett, R-N.J., chairman of the House Financial Services Capital Markets Subcommittee, told Securities and Exchange Commission Chairman Mary Schapiro in a letter on Monday to wait on final action in reconsidering the SEC’s position on “net equity” in the Bernie Madoff case. Garrett wants to hold off until after the Government Accountability Office publishes its report evaluating the actions of the Securities Investor Protection Corp. and its trustee.
Garrett (left) requested that the GAO conduct a review of some of the issues engendered by SIPC and its trustee’s handling of the Madoff fraud. While the Madoff SIPC liquidation is “unprecedented in its size and complexity,” Garrett said, “Congress nonetheless established rules and processes to be followed and observed in these unfortunate situations–rules and processes designed to re-establish order, expedite liquidations, protect innocent victims and strengthen confidence in our financial markets.
The net equity issue was raised in the SEC’s inspector general, H. David Kotz’s, recent report regarding conflicts of interest in the Madoff case, specifically as they relate to former SEC general counsel David Becker. Kotz 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.
Kotz went on to say in the report 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.”
Kotz said 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.
Garrett told Schapiro in his Oct. 3 letter that the information and analysis from the GAO will aid the subcommittee in determining if SIPC and its Trustee have met their statutory roles and responsibilities, as well as benefit the subcommittee as it reviews and considers H.R. 757, The Equitable Treatment of Investors Act, which would reaffirm and clarify key protections for ordinary investors that were put in place when Congress passed and amended the Securities Investor Protection Act.
Garrett said the GAO report will also benefit the commission “as it re-evaluates several of the important policy questions resulting from the Madoff fraud.”
“I recommend that the Commission delay reconsideration of these matters until the GAO has completed its work and the Commission subsequently reviews it,” Garrett told Schapiro.
Ron Stein, president of the Network for Investor Action and Protection, said in reaction to Garrett's letter to Schapiro that Garrett "is wise to shine a light on the SEC's questionable decision process ridden with misapplications of law and enormous potential conflicts of interest for both SIPC and their Trustee. We hope a rational reevaluation of SEC and SIPC policy can be achieved and that confidence in our investor protection regime can be restored."
Stein said that as the Network has asserted for some time, "SIPC and the Trustee have looked to reduce payouts in order to protect the SIPC fund. Protecting the fund over investors is clearly not what Congress intended when SIPA was enacted. Mr. Garrett's letter correctly indicates that protecting SIPC is not a standard allowed in law, and the entire decision must be fully reconsidered free of conflicts of interest. We hope the General Accounting Office will look at the conflict of interest issue to determine if the Trustee is capable of fulfilling his responsibilities responsibly and objectively."