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.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
Among recent enforcement actions by the SEC were charges against a husband and wife, executives at China-based RINO International Corp., for diverting funds from a securities offering for their own use.
In addition, FINRA censured and fined firms for violations ranging from reporting failures to lack of supervisory personnel with foreign language skills adequate to track employee communications in that language and lack of sufficient barriers to safeguard nonpublic information to failure to monitor employee trading activity in outside brokerage accounts and failure to prevent interaction between a firm’s investment banking and research departments.
Husband and Wife Charged by SEC With Diverting Funds
The SEC charged a couple, executives of China-based RINO International Corp., with overstating company revenues and then diverting millions from a securities offering to buy a California home, cars and designer clothes and accessories.
RINO is a holding company for subsidiaries that manufacture, install and service equipment for the Chinese steel industry. It became a China-based U.S. issuer through a reverse merger in 2007.
In 2011, the SEC had issued a trading suspension against the company, based on questions raised about its public filings from 2008 to 2010, which were signed and certified by its CEO, Dejun “David” Zou, and chairwoman of the board, Jianping “Amy” Qiu, and which overstated company revenues by the inclusion of false sales contracts.
It turned out that RINO maintained two sets of books: one for China filings and another for U.S. filings. According to the Chinese books, from Q1 2008 through Q3 2010, the company had sales of approximately $31 million. The U.S. books, on the other hand, indicated sales that were more than 15 times higher than the figures reported in China, by means of phony contracts that boosted the figures to about $491 million for the same period.
Zou and Qiu used $3.5 million of the company’s money to buy themselves a luxury home in Orange County, and then hid the fact from company investors, according to the SEC. They also offered varying explanations in response to questions about those funds from the company’s outside auditor. They also used company funds on a shopping spree for other luxury goods and neither disclosed them in the company’s public filings, nor recorded them as personal expenses.
When RINO’s outside auditor discovered and questioned the $3.5 million diversion, the couple first told the auditor that RINO intended the money for a down payment on a U.S. joint venture opportunity. The auditor questioned further, and was then told by Zou that he had authorized the money to be used to buy a property that would be used as an office and temporary housing for RINO’s employees on visits to the U.S.
Not satisfied by these tales, particularly because of the kind of house that the couple had purchased, the auditor went to RINO’s audit committee with his concerns. The couple then agreed to recategorize the $3.5 million as a loan, and signed a promissory note bearing interest at current market rates. They purportedly repaid the loan on May 10, 2010, using funds wired from a Chinese bank account to RINO’s U.S. bank account. That money was later wired back to an account in China.
Without admitting or denying the SEC’s allegations, RINO, Zou and Qiu consented to a number of penalties. Zou and Qiu agreed to pay $150,000 and $100,000, respectively, and have also paid the disgorgement amount of $3.5 million into a related class-action settlement. They also have been prohibited from serving as officers and directors of a public company for 10 years. The settlement is subject to court approval.
Reporting Failures Bring Deutsche Bank Securities FINRA Fine, Censure
Deutsche Bank Securities was censured by FINRA and fined $215,000 over failures in reporting and over execution of trades in securities while a trading halt was in effect.
Other failures included failure to disclose required information on customer confirmations; to report the correct trade time to the Real-time Transaction Reporting System (RTRS) in municipal securities transaction reports; to report information regarding purchase and sale transactions in municipal securities to the RTRS in the correct manner and in a timely fashion; and to show the correct trade time on brokerage order memoranda.
In addition to numerous other reporting issues, the firm also carried out transactions in securities while a trading halt was in effect with respect to each of the securities.
Failure to Communicate Brings FINRA Fine, Censures
Global Hunter Securities found itself the target of FINRA censure and a fine of $150,000 after it was found, among other violations, to have failed to establish and maintain an adequate system to supervise written communications conducted in a foreign language. The firm did not have supervisory personnel fluent in the language of associated persons when certain aspects of its research and investment-banking businesses involved written communications in that language. As a result, it did not effectively monitor communications in that language.
Other violations included failure to establish and maintain an adequate system for monitoring employee trading activity in accounts held at other FINRA member firms; to enforce its own procedures requiring newly hired personnel to disclose their outside brokerage accounts; and to adequately monitor employee trading activity in those accounts. That led to the firm’s failure to identify improper trading activity by a member of its research department in an account held at another FINRA member firm.
The firm lacked an information barrier to keep employees from misusing nonpublic information, and also lacked a means to track whether such misuse was occurring, and although it maintained a restricted list as specified in a joint NYSE/FINRA memo, it did not do so in accordance with the memo’s requirements or even its own policies and procedures. It also issued equity security research reports that failed to comply with FINRA disclosure requirements, and failed to restrict relationships between its investment banking and research departments.
Read SEC Enforcement Roundup: Harrisburg, Pa., Charged With Securities Fraud on AdvisorOne.