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 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.
Are RIAs and other financial professionals guilty until proven innocent? Not quite, but the burden of proof on the part of the SEC against those accused is so low it might appear that way. It could easily result in a lifetime bar from the advisors' main source of income.
Russell Ryan, a former assistant director of the SEC's division of enforcement, exposes the mark regulators must reach to win their case. In a Wall Street Journal op-ed on Monday, Ryan argues the SEC can impose quasi-criminal penalties based on the mere “preponderance of evidence.”
Using the trial of ex-Goldman Sachs vice president Fabrice Tourre, set to begin this week, as a jumping off point, he employs a sports metaphor to indicate just what Tourre will face.
“Envision a one-possession football game with the government team receiving the kickoff,” Ryan writes. “Beyond reasonable doubt requires the government to score a touchdown to win; clear and convincing evidence requires a field goal; and preponderance of evidence requires advancing the ball at least an inch past the 50-yard line.”
It’s the last that the SEC must demonstrate in the Tourre case, with which Ryan takes issue.
“Even in civil cases, however, charges of fraud are often subjected to an intermediate standard that requires proof by ‘clear and convincing evidence.’ Oddly enough the SEC usually isn't held to this standard either, even when it accuses people of fraud.”
Why does the SEC have such a negligible burden of proof?
Once a “sleepy regulator” with relatively little power to punish wrongdoers,” he explains, Congress has now transformed (or is attempting to transform) the agency into an “aggressive punisher.”
Ryan concludes with what he calls “a modest proposal.”
“When a federal law-enforcement agency sets out to punish a private citizen or business based on accusations of fraud or similar wrongdoing, it should have to prove its case by more than just a preponderance of the evidence. While proof beyond reasonable doubt may be too high a hurdle in nominally civil cases that can't result in incarceration, proof by clear and convincing evidence seems the least that due process should demand.”
Check out Former SEC Compliance Chief Tells White: Stop Suing Compliance Officers on ThinkAdvisor.