More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- 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.
Recent actions taken by FINRA include a cease and desist order and an expulsion, both over fraudulent conduct, and the signing of a memorandum of understanding with the Netherlands Authority for the Financial Markets (AFM) regarding financial market surveillance and supervision.
Firm Expelled, CEO Barred Over Fraud
FINRA announced that it had expelled New York-based Hudson Valley Capital Management and barred CEO Mark Gillis from the securities industry for defrauding its clearing firm and customers by using their funds and securities to cover losses caused by Gillis' manipulative day trading.
FINRA found that in 2012, Hudson Valley, acting through Gillis, used the firm's Average Price Account to improperly day trade millions of dollars of stock. Gillis then manipulated the share prices of these stocks and withdrew the proceeds of his day trading through accounts he controlled.
When Gillis' fraudulent trading caused significant losses in the firm's account, he covered those losses by making unauthorized trades involving customer accounts. Gillis purchased thousands of shares of securities in the open market in the firm's account and allocated these shares to customers at markups between 177%–280%.
He also converted a customer's funds to pay for an unauthorized stock purchase and caused another customer to sustain a loss of approximately $400,000. When confronted about unauthorized trades that occurred in their accounts, Gillis lied to two customers about the transactions to hide his misconduct, and lied to FINRA staff during sworn testimony.
Hudson Valley failed to supervise Gillis' trading activities at the firm; thus, Gillis was able to conduct his fraudulent trading scheme without restriction. Gillis' scheme caused a net capital deficiency for Hudson Valley in excess of $350,000.
In a statement, Cameron Funkhouser, executive vice president of FINRA's Office of Fraud Detection and Market Intelligence, said, "FINRA strives to quickly address egregious broker misconduct. In this instance, FINRA fully investigated Mr. Gillis and Hudson Valley Capital Management within weeks of Gillis perpetrating his fraudulent scheme, and obtained evidence that led to the disciplinary action announced today."
Cease and Desist Order Filed on Fraudulent Sales
Michigan-based WR Rice Financial Services and its owner Joel Wilson were the targets of a temporary cease-and-desist order (TCDO) filed by FINRA. The action was taken to halt further fraudulent sales activities, as well as the conversion of investors' funds or assets. FINRA filed the TCDO based on the belief that ongoing customer harm and depletion of customer assets would likely continue before a formal disciplinary proceeding against WR Rice and Wilson could be completed.
FINRA also issued a complaint against WR Rice and Wilson, charging fraud in the sales of limited partnership (LP) interests in entities affiliated with the Diversified Group and American Realty Funds Corp., companies in which Wilson has ownership interest and control.
In its complaint, FINRA alleged that WR Rice, Wilson and other registered representatives at the firm sold more than $4.5 million in LP interests to approximately 100 investors from predominantly low- to moderate-income households, while misrepresenting or omitting material facts.
FINRA charged that Wilson and WR Rice raised funds promising that the proceeds would be invested in land contracts on residential real estate in Michigan, paying an interest rate of 9.9%. However, what actually happened, according to the allegations, was that investors' funds were used to make unsecured loans to companies Wilson owned or controlled.
In addition, FINRA alleged that WR Rice and Wilson failed to disclose to investors that Wilson extended the improper loans due to an inability to pay them as they became due. Wilson is also charged with providing fabricated documents to FINRA related to the LP offerings, and with failing to provide full and complete testimony during FINRA's investigation of him and his firm after he was confronted with the falsified documents. FINRA's rules provide the individuals and firms named in a complaint the opportunity to file a response and request a hearing before a FINRA disciplinary panel.
FINRA, AFM Sign MOU on Financial Market Surveillance and Supervision
FINRA announced that it had signed an MOU with the Netherlands Authority for the Financial Markets (AFM) regarding the sharing of information aimed at strengthening and improving cooperation.
The memorandum, signed by Richard Ketchum, chairman and CEO of FINRA and Ronald Gerritse, chairman of the executive board of the AFM, establishes a formal basis for cooperation among FINRA and the AFM to more effectively conduct their oversight of regulated markets and financial firms.
In a statement, Gerritse said, "The AFM supervises the honest and efficient operation of the capital markets. Targeting possible market abuse is one of our main objectives. I consider the signing of this MOU as an important initiative to strengthen our supervisory cooperation, which is important for effective international oversight."
Ketchum said in a statement, "This agreement with the AFM strengthens our cooperation with The Netherlands in key areas, including investigations and market surveillance. Surveillance and transparency are more important than ever and demand close cooperation between regulators. I welcome this agreement and look forward to a long and productive partnership with the AFM."
The two main goals of the MOU are to organize the transmission of information between authorities regarding market surveillance and investigations into market abuse, and to facilitate the sharing of information on trading by firms coming within the two authorities' respective jurisdictions.
The agreement also provides for the AFM and FINRA to keep each other informed about practices in their markets and about issues concerning financial markets in general.