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.
- 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.
The SEC charged Wachovia Bank on Thursday with fraudulently engaging in secret arrangements with bidding agents to improperly win business from municipalities and guarantee itself profits in the reinvestment of municipal bond proceeds.
Wachovia neither admitted nor denied the allegations in the SEC’s complaint, and has consented to the entry of a final judgment enjoining it from future violations of Section 17(a) of the Securities Act of 1933; it has also agreed to pay a penalty of $25 million and disgorgement of $13,802,984 with prejudgment interest of $7,275,607. The settlement is subject to court approval.
The Securities and Exchange Commission alleged that Wachovia brought in millions of dollars in illicit gains during an eight-year period from 1997 to 2005 by fraudulently rigging at least 58 municipal bond reinvestment transactions in 25 states and Puerto Rico.
Using a practice known as “last looks,” Wachovia won some bids by getting information from bidding agents about competing bids. It also won bids through “setups” in which bidding agents deliberately obtained nonwinning bids from other providers so that it could rig the field in Wachovia’s favor. In addition, said the SEC, Wachovia facilitated some bids rigged for others to win by deliberately submitting nonwinning bids.
Portions of the proceeds of municipal securities sales to investors often are not spent right away by municipalities, but instead are temporarily invested in municipal reinvestment products until the money is used for the intended purposes. Typically these products are financial instruments designed to meet municipalities’ specific collateral and spend-down needs, such as guaranteed investment contracts, repurchase agreements, and forward purchase agreements.
The proceeds of tax-exempt municipal securities generally must be invested at fair market value, and the most common way of establishing that is via competitive bidding, in which bidding agents
Wachovia’s fraudulent practices and misrepresentations, said the SEC, not only undermined the competitive bidding process, but negatively affected the prices municipalities paid for reinvestment products. Not only did Wachovia deprive certain municipalities from a conclusive presumption that the reinvestment instruments had been purchased at fair market value, it also jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted.
Banc of America Securities was previously charged in municipal reinvestment corruption, and agreed to a $137 million settlement with the SEC and other federal and state authorities on Dec. 7, 2010. However, on Thursday, the SEC charged the firm’s former vice president and marketer, Dean Pinard, for his role in various improper bidding practices.
Pinard is the beneficiary of a grant of conditional amnesty from criminal prosecution by the Department of Justice provided to Bank of America’s parent corporation. Pinard, who cooperated with the investigation, agreed to pay more than $40,000 to settle the SEC’s case without admitting or denying the findings. He is barred from association with any broker, dealer, investment advisor, municipal securities dealer or municipal advisor.