More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
The number of court-approved securities class-action settlements hit a 14-year low in 2012, but total settlement amounts more than doubled over the previous year, according to data released Wednesday by Cornerstone Research.
Fifty-three settlements were reported in 2012, an 18% decrease from 2011, and a decline of more than 45% from the 10-year average from 2002 through 2011, according to Cornerstone’s Securities Class Action Settlements—2012 Review and Analysis.
But total settlements in 2012 were $2.9 billion, up from $1.4 billion in 2011.
The number of mega-settlements—those above $100 million—accounted for nearly 75% of 2012 settlement dollars, the report found.
The report notes that as securities class actions historically take a number of years to settle, the decrease in settlements may be due in part to the relatively low number of cases filed in 2009 and 2010. One-third of the settlements in 2012 were for issuers in the financial services industry, with the technology and pharmaceutical industries being the next most prevalent sectors, the report found.
The average reported settlement amount dramatically rose from 2011 levels—more than 150%—to $54.7 million in 2012 from the inflation-adjusted amount of $21.6 million in 2011, the report notes.
Laura Simmons, Cornerstone’s senior advisor, noted in a statement that “it is well known that larger cases tend to settle for smaller proportions of shareholder losses. However, never has this been more apparent than in the 2012 data, which revealed an all-time high for ‘estimated damages’ and a historic low in settlements as a percentage of ‘estimated damages.’”
Based on the volume of recent securities class-action filings, Simmons says, “the unusually low number of settlements reported in 2012 is unlikely to persist in the future.”
Professor Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse, added in the same statement that “class-action securities fraud litigation is, like many other lines of business, ‘hit driven,’ in that a small number of settlements often account for a large percentage of the dollar flow. That fact of life can make annual settlement data quite lumpy.”
Settlement trends, Grundfest continued, “are often best viewed over time periods longer than a year, and by carefully analyzing settlement data to reflect the underlying characteristics of the cases being settled. So, just as a lull in last year’s data suggested a pickup for this year in the aggregate statistics, it is always possible that this year’s bump could cause total settlement dollars to tick downward next year.”