More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- Meeting and Exceeding Clients and Regulators’ Expectations Although it can be difficult, there are ways for RIAs to meet or exceed client expectations, increase customer satisfaction, and help firms retain current clients and attract new ones.
Among the recent enforcement actions taken by the Department of Labor (DOL), the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) were a settlement of $1.27 million to be paid by an advisory firm to 13 pension plans; charges in an insider trading ring; and a number of fines and censures over failures to report, to control trading limits, to retain electronic messages and to set reasonable markups.
Advisory Firm to Pay $1.27 Million to Pension Plans after DOL Investigation
The Department of Labor announced that USI Advisors, a wholly owned subsidiary of USI Consulting Group, a Goldman Sachs Capital Partners company, has agreed to pay $1,265,608.70 to 13 pension plans to resolve alleged violations of the Employee Retirement Income Security Act between 2004 and 2010.
The Glastonbury, Conn.-based fiduciary investment advisor was found in an investigation to have made investments in mutual funds on behalf of ERISA-covered defined benefit plan clients and received 12b-1 fees from those funds. However, it failed to fully disclose the receipt of the 12b-1 fees or to use those fees for the benefit of the plans, either by directly crediting the amounts to the plans or by offsetting other fees the plans would be obligated to pay the company.
Under the terms of the settlement, USI Advisors has agreed not to provide bundled investment advisory and actuarial services to any ERISA-covered defined benefit plan client without first entering into a written agreement, contract or letter of understanding that specifies the services provided and whether the company or its affiliates will act as a fiduciary to those plans. USI Advisors also will provide to clients a description of all compensation and fees received, in any form, from any source, involving any investment or transaction related to them.
SEC Charges 8 With Insider Tranding on Pharma Merger
The SEC announced that it has charged eight individuals living in the Griffin, Ga., area for their involvement in an insider trading ring that generated more than $500,000 in illegal profits based on nonpublic information about an upcoming company merger.
According to the SEC’s complaint filed in federal court in Atlanta, local accountant Thomas Melvin Jr. exploited confidential information from a client who was on the board of directors at Chattem, a Tennessee-based pharmaceutical company known for such over-the-counter products as Allegra, Gold Bond and Icy Hot. In late 2009, after Chattem’s board was informed that the French pharmaceutical manufacturer Sanofi, then Sanofi-Aventis, made a tender offer to purchase the company, Melvin’s client sought his professional advice on the financial impact of his Chattem stock options being involuntarily exercised due to a change in control of the company.
The Chattem board member made clear to Melvin during their private conversations and meetings that the topic of discussion was confidential. The board member shared the likely increase in stock price, $20 to $25 per share, from the pending transaction as well as its potential timing.
The four told by Melvin were C. Roan Berry, a friend who lives in Jackson, Ga.; Michael Cain, a friend who lives in Griffin, Ga.; Joel Jinks, a friend who lives inGriffin and was a one-time candidate for local sheriff; and R. Jeffrey Rooks, Melvin’s longtime accounting partner who lives in Griffin.
The SEC alleges that Berry tipped his friend and neighbor in Jackson, Ashley J. Coots, who in turn tipped his friend and former co-worker Casey D. Jackson, who lives in Atlanta; in addition, it alleges that Cain, who works at a brokerage firm, tipped his friend Peter C. Doffing, who lives in Milner, Ga., and purchased out-of-the-money call options based on the nonpublic information.
Four of the eight men—Berry, Coots, Jackson and Rooks—agreed to settle the SEC’s charges and pay back all of their ill-gotten gains plus interest and penalties for a combined total of more than $175,000. The SEC will proceed with litigation against Melvin, Cain, Doffing and Jinks.
Exception Monitoring Failed
Merrill Lynch, Pierce, Fenner & Smith Inc. was censured and fined $450,000 on FINRA findings that, prior to March 1, 2009, it did not have an exception-based reporting system that specifically monitored for potentially unsuitable concentration levels in structured products in customer accounts. That affected sales of about 650,000 structured product purchases between Jan. 1, 2006, and March 1, 2009, of which more than half involved structured product offerings issued by the firm’s parent company.
Without admitting or denying the findings, the firm consented to the sanctions and entry of findings that stated that while the firm, in supervising sales of securities to retail customers, relies upon automated exception-based reporting systems to flag transactions and/or accounts that met certain predefined criteria, prior to March 1, 2009, did not have a system in place that specifically monitored for structured product levels of unsuitable levels in client accounts.
MSSB Fined After Overnight Trading Losses
Morgan Stanley Smith Barney was censured and fined $450,000 by FINRA over findings that the firm failed to adequately safeguard or control a system that allowed a junior trader to accumulate a position more than double that of its agency desk limit and many times his own position limit that resulted in substantial losses for the firm.
Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings on the junior trader’s actions. He was responsible for trading Fannie Mae and Freddie Mac products in a cash book and Eurodollar and Treasuries futures contracts in a futures book, and was permitted to trade remotely so he could trade after hours and react to global events.
When the market turned against him that morning, he tried but failed to reduce his exposure and suffered losses. According to the findings, the firm at that time identified on a T+1 basis a risk anomaly that was traced to the trader, cutting off his access to the trading system. He had reduced the cumulative position to $740 million, but the five-year agency book sustained a realized loss of $4.7 million.
The firm liquidated 75% of the remaining contracts and liquidated the rest the following day, realizing additional losses. The firm’s account sustained realized losses based on his trades over two days that totaled approximately $14.9 million. However, since these were proprietary positions, there was no customer loss.
FINRA found that the firm did not have adequate safeguards or controls in place to detect that the trader had exceeded his position limit, either during his trading during the day or while trading remotely overnight, and also failed to prevent him from exceeding his position. The trading desk did not have a consolidated view to capture and monitor trading activity across products and systems, which contributed to the firm’s failure to detect the trader’s actions.
Merrill Lynch Unit Fined Over Instant Messages
FINRA censured and fined Merrill Lynch Professional Clearing Corp. $80,000 on findings that it failed to retain instant messages sent and received by employees who joined the firm as part of an entity the firm acquired, and who sent and received instant messages using non-firm messaging systems.
Without admitting or denying the findings, the firm consented to the sanctions and entry of the findings, which stated that the firm failed to retain sender/recipient information for electronic messages that the same acquired entity’s legacy employees sent and received through a proprietary trading system. The electronic system also did not automatically verify the quality and accuracy of the storage media recoding process. The electronic messages sent and received via the proprietary trading system were not stored accurately, nor could complete and accurate indexes and records be readily downloaded.
FINRA Slaps NFP for Excessive Markups; Orders Restitution
NFP Securities was censured, fined $43,121.39 and ordered by FINRA to pay $43,121.39, plus interest, in restitution to a customer. Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it charged excessive markups on several riskless principal corporate bond transactions in a customer’s account.
The findings also stated that the firm’s supervisory system and WSPs were not reasonably designed to ensure that prices at which it sold debt securities to customers in principal transactions were fair and reasonable, nor designed to achieve compliance with all applicable laws, rules and regulations pertaining to effecting principal transactions with customers. Other shortcomings relating to price fairness and supervisory reviews of markups and markdowns were also in the findings.
FINRA Fines E*Trade for Failure to Report Complaint Data
E*Trade Securities was censured and fined $75,000 by FINRA on findings that it failed to report to FINRA the name and other identifying information of registered representatives named in customer complaints it received alleging the registered representatives’ misconduct.
Without admitting or denying the findings, the firm consented to findings that stated the vast majority of the complaints alleged sales practice violations like unauthorized transactions, mismanagement, unsuitability and misrepresentations related to auction rate securities, and that on statistical and summary reports concerning complaints, the firm incorrectly reported the location of the branch office where the grievance occurred, in some instances instead saying complaints originated in the locations where they were reviewed.
Additionally, the findings included failures by the firm to report complaints concerning auction rate securities that were sales practice related; those complaints mainly alleged illiquidity, misrepresentations and poor recommendations, but one alleged fraud and another alleged unauthorized trading.
Rather than report the complaints itself, the firm’s sister broker-dealer, with which it shared some overlapping compliance systems, reported the complaints, and incorrectly reported them under a non-sales practice problem code for Account Administration and Processing (Code 61).
FINRA Hits LPL for Untimely Reporting
LPL Financial was censured by FINRA and fined $17,500 for findings that it failed to report information regarding transactions effected in municipal securities to the real-time transaction reporting system (RTRS) in the manner prescribed by the Municipal Securities Rulemaking Board (MSRB).
Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to report information about municipal securities transactions to an RTRS portal within 15 minutes of trade time. It also was found to have failed to report the correct trade time to the RTRS for these transactions, and failed to show the correct execution time on some brokerage orders memoranda, as well as failing to report S1 transactions in TRACE-eligible agency debt securities to the trade reporting and compliance engine (TRACE) within 15 minutes of the execution time.