More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
Federal securities class action activity fell in the first six months of 2012 compared with 2011, with 88 filings in the first six months of 2012, a drop of 6% from both the first half and second half of 2011, according to Securities Class Action Filings—2012 Mid-Year Assessment.
The report, a semiannual assessment by the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research, notes that the slight decrease in total filings was largely due to the substantial decline in Chinese reverse merger (CRM) and merger and acquisition (M&A) filings.
There were five CRM-related filings and seven M&A-related filings in the past six months. “Compared with the first half of 2011, CRM filings were down 79% and M&A filings were down 67%,” the report states. And compared with the second half of 2011, “CRM filings were down 44% and M&A filings were down 68%.”
Despite the drop in CRM-related filings, filings against foreign issuers as a percentage of all filings were greater than every year since 1997, with the exception of 2011. “While the number of these nontraditional filings (i.e., CRM and M&A filings) has declined, traditional securities class-action filings have increased by 23% since the second half of 2011,” the report says.
Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse, said in releasing the report that the “decline in litigation activity related to Chinese reverse mergers comes as little surprise, as that sector of the market has already been badly hit by concerns over the integrity of Chinese private-company financial statements and these deals have been disappearing from the market.”
As for M&A-related filings, Grundfest says that Bloomberg found that in the second quarter of 2012, “the aggregate deal count reached the lowest level since the third quarter of 2009, and that factor would contribute to the decline in federally filed M&A litigation: you can’t bring merger litigation over a merger that hasn’t happened.”
But looking over the horizon, Grundfest warns that “the LIBOR-litigation industry is clearly a sector to watch for years to come. The magnitude of the potential exposures and the complexity of the underlying damages claims will likely generate large amounts of litigation activity in many geographies. Much of that litigation activity will occur away from the U.S. class-action securities fraud sector, but more lawsuits are virtually assured.”
The report also found that out of the 88 filings in the first half of 2012, 10 involved companies in the S&P 500. “This is slightly more than at midyear 2011 when eight S&P 500 companies had been named in new securities class actions,” the report states.
Other key findings of the report include:
- Filings against foreign issuers as a percentage of total filings decreased in the first half of 2012 after a sharp increase in 2011—driven by CRM filings—but remained significantly above historical levels. After rising to 36% in 2011, the percentage of total filings against foreign issuers in the first half of 2012 decreased to 26%, still well above the average of 14% from 2008 to 2010 and 9% from 1997 to 2010.
- In 2011, Chinese firms were named in 40 of the 68 filings against foreign issuers, but in the first half of 2012, they accounted for only 12 of the 23 filings against foreign issuers. In the first half of 2012, there were seven filings against Chinese companies that were not related to CRMs, compared with eight such filings in all of 2011.