More On Legal & Compliancefrom The Advisor's Professional Library
- Using Solicitors to Attract Clients Rule 206(4)-3 under the Investment Advisors Act establishes requirements governing cash payments to solicitors. The rule permits payment of cash referral fees to individuals and companies recommending clients to an RIA, but requires four conditions are first satisfied.
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
Among recent actions by the SEC and FINRA were charges against a hedge fund analyst and two friends for insider trading, and sanctions and fines for one firm for reporting and disclosure failures and another for options reporting failures.
Hedge Fund Analyst, Two Others Charged by SEC for Insider Trading
The SEC charged Matthew Teeple, a hedge fund analyst from San Clemente, Calif., with insider trading, along with two of his friends—a company executive who provided tips and a Denver-based investment professional.
According to the regulator, Teeple got the essential information on July 16, 2008, from David Riley, the chief information officer at Foundry Networks, which was to be acquired by Brocade Communication Systems on July 21 for approximately $3 billion. Armed with nonpublic data, Teeple got the hedge fund advisory firm where he worked to buy up large quantities of Foundry’s stock before news of the acquisition went public. The stock gained 32% on the news, and the hedge funds the firm managed saw millions added to their bottom lines.
Teeple is accused of telling, among others, John Johnson, a Denver-based investor with whom he had become friends thanks to an earlier working relationship. Johnson also made illegal trades on Teeple’s tip, as did the others Teeple told.
The acquisition took till Dec. 18 to be completed, and Riley slipped Teeple additional inside information on at least two other major announcements before Foundry actually made them—on an April earnings forecast and on a delayed shareholder vote on the acquisition—and Teeple’s firm used these as well to make money or avoid losing money, the SEC said.
The SEC, whose investigation is continuing, seeks disgorgement of gains, prejudgment interest and additional financial penalties. The U.S. Attorney’s Office for the Southern District of New York has also announced criminal charges against Teeple, Riley and Johnson.
HSBC Securities Fined, Sanctioned by FINRA
HSBC Securities was sanctioned by FINRA and fined $250,000 over numerous issues that included failure to accurately report short sales, incomplete disclosures and failure to retain text messages on BlackBerrys with text functionality.
FINRA found that short sales were reported as long sales because of a failure by the middle office to accurately include short sale indicators on back-office communications. As a result, for four years the firm was reporting short sales as long on their Blue Sheets. In addition, the firm did not deliver prospectuses or offering memoranda that were required for fixed-income transactions; failed to include some investment banking disclosures to research reports because of a breakdown in its automated feeds; and failed to accurately map company identifiers, which added to the disclosure issue.
HSBC neither admitted to nor denied the charges.
Scottrade Sanctioned, Fined by FINRA on Options Reporting Failures
Scottrade, Inc. racked up four years’ worth of options reporting failures, and as a result was censured by FINRA and fined $125,000. FINRA found that the firm, which neither admitted nor denied the findings, failed to report reportable options positions in standard options to the Securities Industry Automation Corp. (SIAC) large option positions reports (LOPR), and failed to report at least one reportable option position in standard options to the Options Clearing Corp. (OCC) LOPR.
Options were also a problem for accounts under common control or acting-in-concert, the firm failed to report numerous reportable positions in standard options to the SIAC and OCC. Some 8,000 were not reported to the LOPR over an 8-month period, and 9,300 options positions were not reported to the LOPR with the correct in-concert information for over 18 months.
There were additional failures to report options, and FINRA also found that for a period of about three years, the firm did not have an adequate system to supervise options reporting for accounts under common control or acting in-concert. It was worse for the supervisory system that conducted accuracy reviews of the firm’s daily LOPR submissions, which FINRA found to be inadequate for more than five years.