More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
Federal securities fraud class action filing activity fell sharply in 2012, with 152 total actions filed compared with 188 in 2011—the second-lowest number of annual filings in 16 years, according to Cornerstone Research.
The research, Securities Class Action Filings—2012 Year in Review, a semiannual report prepared by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse, attributed the decrease in total filings to declines in federal merger and acquisition (M&A) and Chinese reverse merger (CRM) filings. Together, they accounted for only 23 filings in 2012, compared with 74 in 2011.
“These waves of cases are most likely over, and future filings of these types are likely to remain at very low levels,” the research says. “In addition, 2012 was the first year in which there were no new filings related to the credit crisis.”
Overall, filings in the financial sector continued to decrease, with 15 filings in 2012 compared with 25 in 2011 and 43 in 2010, the research found. “Filing activity continued to be most prevalent against companies in the consumer noncyclical sector. Of the 49 filings in this sector, 33 were against health care, biotechnology and pharmaceutical companies.”
Continuing a pattern observed in 2011, fewer filings targeted very large companies in 2012, according to the research. “An analysis of S&P 500 companies named as defendants in securities class actions shows that only one out of every 29 was the subject of a new filing in 2012, making 2011 and 2012 the least litigious for S&P 500 companies in the past 13 years.”
Dr. John Gould, senior vice president of Cornerstone Research, said in a statement announcing the report’s findings that what stood out in 2012 “was the absence of a filing trend that influenced the total number of new cases. In the past there have been observable filing types, such as IPO cases, options backdating, mergers and acquisitions, or most recently, Chinese reverse mergers.” However, “2012 was not dominated by any such trend. Interestingly, in a year characterized by a dramatic drop in securities class-action filings, the number of traditional Rule 10b-5 ‘stock drop’ filings actually increased in 2012.”
Meanwhile, data in the recently published SEC report on the Dodd-Frank whistleblower program “provide potentially valuable insights for possible future securities litigation trends,” the research notes. “From Oct. 1, 2011, through Sept. 30, 2012, the SEC received 3,001 whistleblower tips. The most common tip categories were corporate disclosure and financials, offering fraud, and market manipulation. Together, these categories accounted for nearly 49% of all tips received.”
Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse, wondered in the same statement if “a shoe is waiting to drop.” The SEC, he said, “claims that the Dodd-Frank bounty program has helped it build a large inventory of high-quality leads as to fraud at publicly traded corporations. But will the commission be able to transform these leads into quality enforcement actions? And, will private-party plaintiffs be successful in prosecuting ‘piggyback’ claims that copy the commission’s complaints? The current quiet patch in private securities fraud litigation could certainly be unsettled if the Dodd-Frank bounty program generates a new wave of private claims.”