More On Legal & Compliancefrom The Advisor's Professional Library
- Suitability and Fiduciary Duty Recommending suitable investments is more than just a regulatory obligation. Many investors bring cases claiming lack of suitability, so RIAs must continuously put the onus on clients to notify the advisor of changes in their financial situation.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
The Securities and Exchange Commission’s (SEC) enforcement division is stepping up surveillance of insider trading with its newly instituted Automated Bluesheet Analysis Project, and is catching more hedge fund advisor fraud with its aberrational performance inquiry team, according to SEC Chairwoman Mary Schapiro.
During a recent speech, Schapiro said that the agency’s automated bluesheet project has added “yet another dimension” to the agency’s investigative capabilities, with enforcement staff using the “newly developed analytics to identify suspicious trading patterns and relationships among multiple traders and across multiple securities, generating significant enforcement leads and investigative entry points.”
Schapiro cited a notable case filed against Matthew Kluger and Garrett Bauer, who she said illegally traded for illicit profits totaling nearly $32 million. She said the two “ran a lucrative insider trading scheme spanning two decades, with Kluger and Bauer successfully hiding their scheme for years by communicating through a middleman using public telephones and prepaid disposable mobile phones.”
While investigators were at first unaware either of Bauer or the middleman’s relationship with Kluger, “parallel analysis of the bluesheet trading data led us to identify the middleman and uncovered Bauer’s relationship with him. The parallel trading gave away the nature of their relationship, despite their efforts, and it informed our theory of the case.”
Thomas Sporkin, a partner with Buckley Sandler in Washington, said at the Securities Enforcement Forum in Washington last week that “greater granularity” in detecting insider trading will be available to the SEC once the consolidated audit trail becomes available online. The consolidated audit trail final rule was approved this summer but “will take at least a year” to implement. “The world will open up to the SEC regarding insider trading once this is in place,” Sporkin said.
SEC Commissioner Luis Aguilar said during the forum that the SEC’s whistleblower program, mandated under Section 922 of the Dodd-Frank Act, which has been in place for a little over a year, is producing quality tips.
“As we considered the contours of the rules to implement the whistleblower program, we heard repeatedly that the implementation of this program would overwhelm the commission and literally shut our program down,” Aguilar said. “We also heard that corporate compliance departments that had been built out as a result of Sarbanes-Oxley would no longer be able to function.”
However, he said: “I’m happy to report that we have not shut down. In fact, we have not even come close.”
Through the whistleblower program, he said, the SEC receives an average of eight tips a day “rather than the avalanche of poor-quality, frivolous tips that were predicted,” with a total of 2,820 tips as of Aug. 8.
Interestingly, Aguilar added, “the volume has been steady without significant fluctuations. Tips have been received from individuals across the United States and from at least 45 foreign countries.”