More On Legal & Compliancefrom The Advisor's Professional Library
- RIAs and Customer Identification Just as RIAs owe a duty to diligently protect their clients privacy and guard against theft, firms also play a vital role in customer identification. Although RIAs are not subject to an anti-money laundering rule, securities regulators expect advisors to address these issues in their policies and procedures.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
Among recent enforcement actions by the SEC and FINRA were charges against a private equity firm, a former executive and an unregistered broker over some $500 million in improper investment solicitations; a $2.8 million settlement over misleading investors about fund performance; censure of a firm for not reporting its involvement in civil litigation related to securities; and censure of another firm for failure to execute short sales properly.
Ranieri Partners Charged by SEC Over Unregistered Broker
Ranieri Partners, a New York-based private equity firm, together with a former executive and an unregistered broker, were charged by the SEC for improperly soliciting more than $500 million for the private funds it managed.
The unregistered broker, William Stephens of Hinsdale, Ill., was hired by former senior managing director Donald Phillips; Phillips, who lives in Barrington, Ill., was a longtime friend of Stephens and was in charge of efforts to raise capital. He was also responsible for overseeing Stephens’ activities; Stephens was supposed to be a “finder” and simply introduce prospective investors.
The finder, however, went far beyond that role, staying in constant contact with investors and providing them with important documentation on investments supplied to him by the firm. He also shared confidential information about other investors and their commitments to the funds, and brought about investments.
Instead of curtailing Stephens’ activities, Phillips not only ignored the signs that his friend was exceeding his supposed role, but provided him with the data he needed to bring about investments for the firm. According to the SEC, Phillips aided and abetted Stephens in his illegal actions.
While neither admitting nor denying the SEC’s findings, all three agreed to settle the charges. Ranieri Partners agreed to pay a penalty of $375,000 and Phillips $75,000, in addition to other actions, and Stephens agreed to be barred from the securities industry.
SEC Charges Oppenheimer & Co. Advisors With Misrepresentation
Two investment advisors at Oppenheimer & Co. (not affiliated with OppenheimerFunds) were charged by the SEC with misrepresenting to investors the valuation policies and performance of a private equity fund that they manage.
Oppenheimer Asset Management and Oppenheimer Alternative Investment Management were found by the SEC to distribute misleading quarterly reports and marketing materials stating that the fund’s holdings of other private equity funds were valued “based on the underlying managers’ estimated values.” In fact, that was not the case at all, and the difference in valuations was substantial.
Oppenheimer Global Resource Private Equity Fund I (OGR), which invests in other private equity funds, was marketed primarily to pensions, foundations, and endowments, as well as wealthy individuals and families, from around October 2009 to June 2010.
OGR’s single largest investment, Cartesian Investors-A, was valued not by its underlying manager, but by OGR’s portfolio manager, who bumped up the value and improved the appearance of OGR’s performance considerably. For the quarter ended June 30, 2009, the internal rate of return for OGR jumped from approximately 3.8% to 38.3%. But the increase was credited to overall performance, and not, as was the case, to the change in valuation methods.
Other misrepresentations included a claim that Cartesian’s value was written up by a third-party valuation firm and that OGR’s underlying funds were audited by third-party auditors. Neither was true.
Without admitting or denying the charges, Oppenheimer has agreed to pay more than $2.8 million to settle. The sum includes a penalty of $617,579 and the return of $2,269,098 to those who invested in OGR during the time period when the misrepresentations were made. In addition, it will pay a penalty of penalty of $132,421 to the commonwealth of Massachusetts in a related action taken by the Massachusetts attorney general.
An Oppenheimer & Co. spokesperson stated: “Oppenheimer Asset Management has cooperated fully with the SEC and the Massachusetts Attorney General’s Office throughout the course of their joint investigation of this matter. Oppenheimer Asset Management believes it has put in place additional policies and procedures designed to ensure that valuations of portfolio positions in its marketing documents are determined in a manner consistent with its obligations to investors. We are pleased to put this matter behind us and to continue to serve our investors with innovative strategies both in the U.S. and around the world.”
FINRA Censures, Fines UBS Securities over Civil Litigation Case
UBS Securities LLC was censured and fined $100,000 by FINRA for failing to report its involvement in a civil litigation case. The firm was named as a defendant in a securities-related case, but failed to provide copies of any of the filings to NASD/FINRA at the time. Instead, some time later it self-reported its failure to FINRA, but even then did not report all of them until a month later.
FINRA came down on the firm for its reporting failures and also for supervisory and WSP failures that were inadequate to keep the firm compliant with NASD reporting obligations.
UBS neither admitted nor denied the findings.
Tejas Securities Group Censured, Fined by FINRA on Short Sales
A fine of $91,000 and censure were waiting for Tejas Securities Group of Austin, Texas, after FINRA found that it had failed to correctly mark short sales as short, and had accepted and/or executed short sales when it neither borrowed nor arranged to borrow the security in question.
FINRA also found that Tejas’ ledger had recorded numerous short sales as long; the firm also failed to report short sales correctly to the FNTRF or the OTCRF, and failed to provide accurate reports to OATS. In addition, customer confirmations were inaccurate, with errors ranging from trade price to execution capacity to commission/commission equivalent charges. There were also supervisory and WSP failures, as well as recordkeeping inaccuracies.
Tejas consented to the censure and fine without admitting or denying FINRA’s findings.