More On Legal & Compliancefrom The Advisor's Professional Library
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
- 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.
The 11th Circuit of the U.S. Court of Appeals on Wednesday vacated the district court’s summary judgment against the Securities and Exchange Commission in a case involving Morgan Keegan’s handling of auction rate securities (ARS).
The SEC brought charges against Morgan Keegan in 2009, accusing the broker-dealer, then based in Tennessee, of misleading thousands of investors about the liquidity risks associated with ARS. The SEC at the time said that it was seeking a court order requiring Morgan Keegan, which has since been purchased by Raymond James, to repurchase the illiquid ARS from its customers.
At the time, the SEC alleged that Morgan Keegan misrepresented to customers that the securities were safe, highly liquid investments that were comparable to money-market funds. Morgan Keegan sold about $925 million of ARS to its customers between Nov. 1, 2007, and March 20, 2008, but the SEC says the BD “failed to inform its customers about increased liquidity risks for ARS even after the firm decided to stop supporting the ARS market in February 2008.”
The district court had ruled that oral misrepresentations Morgan Keegan brokers made to individual customers regarding the liquidity of ARS were immaterial as a matter of law because Morgan Keegan had disclosed those risks in written documents, even though the customers were not given or otherwise made aware of those documents.
In vacating the summary judgment, the 11th Circuit rejected the district court’s conclusion that the SEC, to sue a firm, “must show an institutional effort to mislead rather than acts by individual brokers.” The 11th Circuit also held that materiality was a question of fact in this case, opining, “the oral misstatements must be considered in the factual context of a weak, or non-existent, distribution of written disclosures.”