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.
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
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.”