More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- 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.
In case you missed it, next week we will have a new entrant in the competition for ‘Most Useless Law Passed by Congress in a Transparent Attempt to Appear to Be Actually Doing Something.'
As reported in Reuters earlier this week, this coming Monday, a bipartisan bill will be introduced in the Senate (by Sen. Jack Reed, D-R.I., and Sen. Charles Grassley, R-Iowa) that will increase the fines that the SEC can levy in cases of securities law violations: maximum fines for individual violations will increase from $150,000 to $1 million, while the top costs for firms will rise from $725,000 per offense to $10 million. In either case, the SEC will also have the option of demanding three times any ill-gotten gains or investor losses.
Apparently, this bill is intended to increase “the costs of doing business” for firms that break securities laws, in an attempt to “break the cycle of misconduct,” as Sen. Reed put it. By way of illustrating this cycle, the bill sponsors cited the decision last November by a Federal judge to reject as too low a $285 million settlement that SEC reached with Citigroup, which allegedly misled investors in the sale of $1 billion worth of mortgage-linked securities.
Perhaps I’m missing something here, but the Citigroup “settlement” could certainly have been higher under existing law, or else why would have Judge Rakoff have rejected it on the grounds of being too low? So that would mean if the Reed/Grassley Bill becomes law, and the SEC’s potential penalties become substantially higher, it would have had exactly no effect on this case, at all. That is just one case, however. In fairness, perhaps we should examine how the bill if passed would affect other high profile financial cases that have hit the headlines, and which Congress has a habit of using to justify many of the the laws it does pass.
The Bernie Madoff case seems like a good place to start, as it has been trotted out as a prime example of the kind of financial fraud that the Dodd-Frank Act was drafted to prevent, and why we need a fiduciary duty for brokers, tighter regulation of RIAs and more glue on Donald Trump’s hairpiece.
As we now know, in an attempt to bolster his increasingly commoditized clearing business, Mr. Madoff began siphoning off funds from his managed investments while maintaining unrealistically high returns to investors out of the inflow of new investments. How do you think the proposed higher SEC penalties (presumably for cases just such as this; that involve financial businesses, and business decisions to commit fraud) would have affected Madoff’s decision to run his classic Ponzi scheme? Considering that under current law, his businesses have been closed, his family bankrupted and he’ll spend the rest of his life in jail, I’m just guessing that that even the spectre of fines amounting to treble investment losses would not have dissuaded Bernie.
Okay, how about a more recent case, say when London traders at JPMorgan managed to rack up what now appears to be in the neighborhood of $6 billion in losses on what are now known as “the London whale” trades. Do you think that JPM CEO Jamie Dimon, who from recent accounts was at least aware of the increasingly risky positions being taken in the company’s U.K office, would have pulled the plug on the whole operation under threat of an additional $10 million in fines per securities violation, in the event that there were any? Again, pretty hard to see.
So what about the most recent scandal to rock the financial world, I hear you ask. What about revelations that Barclays Bank, and possibly JPMorgan Chase (again), Bank of America and Citgroup, conspired to manipulate the LIBOR benchmark interest rate to the advantage of their own financial positions and/or balance sheets? The revelation that the LIBOR index rate, which underpins literally trillions of dollars of derivative securities investments and commercial and mortgage loans across the globe were ‘fixed,’ strikes at the heart of the entire financial system. And if current reports are accurate, this has been going on since the Market Meltdown and its aftermath, that is, during the watch of the U.S. Congress which was ‘fixing’ the very same financial system with Dodd-Frank, and while the SEC was busy in both financial reregulation and the apprehension of any evildoers involved in the increasing number of debacles.
Would stiffer SEC penalties have dissuaded Barclays (in its U.S. operations) and other U.S. banks (if they acted in a similar fashion) from manipulating LIBOR? Or would the billions of dollars of potential gains from their actions have proven just too much of an attractive nuisance?
I’m going to go out on a limb here, and speculate that in these and many smaller cases, stiffer potential penalties probably would have made little difference. While there might be some firms somewhere calculating the cost of penalties for securities violations vs. their potential gain, if any such calculations are going on, I’d bet euros to dollars that the chances of actually getting caught in the first place weigh more heavily in most such equations.
If it’s truly interested in deterrence, perhaps Congress’s time would be better spent increasing the likelihood that the SEC will catch anyone—by, oh, I don’t know, maybe increasing their funding, rather than withholding it as punishment for not catching Madoff, et al., sooner. But that’s just my opinion, I could be wrong.