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.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
The Bank of New York Mellon Corp., parent company of clearing and custodial firm Pershing LLC., agreed to pay $1.3 million to settle an investigation into trading of auction rate securities. The investigation dealt specifically with one of the company's subsidiaries, Mellon Financial Markets (now BNY Mellon Capital Markets).
Under the agreement, BNY Mellon will cease and desist from any further violations of the Martin Act and Executive Law, a statute that covers antifraud and deception in the sale of securities. BNY Mellon will pay $1.3 million in penalties, fees and costs to New York, Texas and Florida.
"Today’s announcement sends a clear message that the manipulative trading of auction rate securities in New York will not be tolerated under any circumstances," New York Attorney General Eric Schneiderman said in a statement. "My office will continue to protect the integrity of NY’s global financial markets at all costs."
The company also reacted to the news. "BNY Mellon Capital Markets is pleased to have resolved this matter, which centered on the isolated conduct of three individuals who are no longer with the company," said BNY Mellon spokesman Ron Sommer.
According to the allegations, from Jan. 22, 2008 through Feb. 22, 2008, Mellon Financial Markets, acting as an intermediary broker on behalf of the Citizens Property Insurance Corp. (CPIC), enabled CPIC to purchase large quantities of its own auction rate securities by placing CPIC’s bids in CPIC’s own auctions as though they were the bids of an independent third-party buyer.
Investigators said CPIC knew that underwriter broker-dealers managing CPIC’s auction rate securities would have rejected CPIC’s bids on its own auctions as self-dealing transactions, and solicited Mellon Financial Markets' assistance to overcome this problem. Mellon Financial Markets agreed to submit CPIC trades into the auctions in order to help CPIC avoid detection.
CPIC’s bids were at below-market rates and resulted in CPIC’s auctions clearing at rates significantly lower than would have resulted had CPIC not intervened in those auctions with its own bids.
The Mellon Financial Markets traders and their managers understood that CPIC’s bidding would set clearing rates lower than they would have been in the absence of such bidding, and that this would be both detrimental and objectionable to other investors bidding on or holding CPIC’s auction rate securities. Some Mellon Financial Markets employees even expressed doubts about whether such trading was legal, according to the investigation.
The trading continued until BNY Mellon’s compliance staff discovered it and ultimately ordered it to stop. Mellon Financial Markets earned approximately $300,000 in fees from the transactions.