More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
Fallout from the Allen Stanford case is still growing. In the latest clash over whether shareholders should be protected from losses á la Bernard Madoff, the National Association of Independent Broker-Dealers has sent a letter to Mary Schapiro, chairman of the SEC, that says the Securities Investor Protection Corp. should not have to cover those losses.
Stanford was charged in 2009 in a Ponzi scheme that defrauded investors of more than $7.2 billion via “safe” offshore certificates of deposit. As previously reported by AdvisorOne.com in early July, “improbable, if not impossible” guaranteed rates of return were promised on the CDs issued by the Antigua-based Stanford International Bank.
In June, the SEC informed SIPC that the Stanford case was appropriate for a proceeding under the Securities Investor Protection Act. In such an eventuality, SIPC, which maintains a special reserve fund mandated by Congress to protect the customers of insolvent brokerage firms, would be required to provide relief to investors.
After conferring with the SEC, SIPC planned to issue a decision in September regarding the applicability of SIPA to the Stanford case. SIPC disagreed with the SEC assessment, saying that Stanford had committed fraud, not theft, and thus his clients were not eligible to be made whole by SIPC.
However, the SEC said it would sue to compel SIPC to devise a plan for investor reimbursement. And in December it did just that, initiating suit to compel the agency to prepare to reimburse investors. SIPC dug in its heels, protesting that the SEC action was inappropriate and conflicted with the Securities Investor Protection Act, which governs SIPC.
Now the NAIBD has waded into the fray, backing SIPC. In its Feb. 16 letter, NAIBD cites SIPC’s own website, which says, “The Securities Investor Protection Corporation was not chartered by Congress to combat fraud.” It further adds, “We do not believe that SIPC or the brokerage industry should provide a backstop for events that transpired outside of the United States, for fraudulent investment schemes, in instances in which investors sought unrealistically high returns, and/or when physical certificates, however worthless, remain in the possession of investors.”
The letter continues, “In summary, we believe that covering the Stanford customers through SIPC is a misfit solution that sets an unsustainable precedent for the future.”
Lisa Roth, NAIBD member advocacy committee chairperson, said in an interview with AdvisorOne on Thursday that, “The point with [the] Stanford [case] that’s significantly different from Madoff is offshore investors who sought to enhance their returns by engaging in private investments, offshore, with CDs. SIPC is not here to provide a backstop against investment loss.”
Roth added that compelling SIPC to make good on such losses would set a dangerous precedent for a number of reasons, one being that investors would then feel free to take significant risks with no fear of loss.
Another factor she raised is the question of funding. “How will SIPC fund [such reimbursements]? The industry will have to pay for that, and where will it come from? How is that appropriate?”
NAIBD has also posted a petition on its website in support of SIPC and its position on the matter.