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.
- Using Solicitors to Attract Clients Rule 206(4)-3 under the Investment Advisors Act establishes requirements governing cash payments to solicitors. The rule permits payment of cash referral fees to individuals and companies recommending clients to an RIA, but requires four conditions are first satisfied.
Following the computer mishap that spewed orders through stock exchanges on Wednesday and led to a $440 million loss at market maker Knight Capital Group, the SEC is speeding efforts to require exchanges and other market centers to ensure the "capacity and integrity of their systems."
Securities and Excnage Commission Chairwoman Mary Schapiro said in a statement on Thursday that she has directed SEC staff to convene a roundtable in the coming weeks to discuss “further steps that can be taken to address these critical issues.”
The apparent trading error by Knight Capital Group on Wednesday “reflects the type of event that can raise concerns for investors about our nation’s equity markets—markets that I believe are the most resilient, efficient and robust in the world,” Schapiro said.
While Wednesday’s event was “unacceptable,” Schapiro said, “I would note that several of the measures we instituted following the flash crash helped to limit its impact. Recently adopted circuit breakers halted trading on individual stocks that experienced significant price fluctuations, and clearly defined rules guided the exchanges in determining which trades could be broken, giving the marketplace certainty.”
Existing rules also “make it clear that when broker-dealers with access to our markets use computers to trade, trade fast, or trade frequently, they must check those systems to ensure they are operating properly,” Schapiro continued. “And, naturally, we will consider whether such compliance measures were followed in this case.”
Bloomberg reported Monday that Knight Capital had received a $400 million cash infusion through the sale of convertible securities after trading losses spurred by the software failure “drove the market maker to the brink of bankruptcy.”
Investors agreed to buy preferred stock that will be convertible into about 267 million common shares, Bloomberg reported the company as saying. Getco, an automated trading firm, Blackstone Group, brokerages Stifel Nicolaus & Co. and TD Ameritrade Holding Corp., and the investment banks and Stephens and Jefferies Group are investing.