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.
- 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 were charges of defrauding investors against a school district and the municipal bond writer that underwrote the district’s bond offering; charges against two investment advisory firms for best execution failures; insider trading against the former CEO of an investor relations firm and, in another case, against two officials in Spain.
The Federal Energy Regulatory Commission won a $410 million settlement from JP Morgan after issuing a notice of alleged violations concerning the bank’s activities in the energy market; and the Labor Department stepped in against Kentucky-based plan fiduciaries, alleging improper use of funds.
Indiana School District and Muni Bond Writer Charged With Investor Fraud
The SEC has charged West Clark Community Schools and Indianapolis-based City Securities Corp. with falsely stating to bond investors that the school district had been properly providing annual financial information and notices required as part of its prior bond offerings.
In a 2007 official statement prepared for a bond offering by West Clark that was to be underwritten by City Securities, the school district said it was in compliance with disclosure obligations related to prior bond offerings. However, West Clark had never submitted required annual reports or notices for a 2005 bond offering, and City Securities did not conduct adequate due diligence to discover this in the course of the 2007 offering.
The SEC also charged Randy Ruhl, head of City Securities’ public finance and municipal bond department, for the misconduct involving West Clark’s disclosures. The agency also found that City Securities and Ruhl gave improper gifts and gratuities, such as multi-day golf trips and sports tickets, to representatives of municipal bond issuers, and then charged these and other expenses back to the issuers disguised as costs for “printing, preparation and distribution of official statements.”
City Securities has agreed to pay nearly $580,000 to settle the SEC’s charges. Ruhl and West Clark also agreed to settlements; Ruhl’s includes not only a one-year collateral bar and a permanent supervisory bar but also disgorgement and prejudgment interest of $20,320 as well as a penalty of $18,155.
Two Investment Advisory Firms Charged With Best Execution Failures
In two separate investigations, New York-based A.R. Schmeidler & Co. (ARS), which is dually registered as an investment adviser and a broker-dealer, and Gregory Goelzer and his Indianapolis-based dually registered firm Goezler Investment Management (GIM), have been charged with failing to seek best execution on client trades placed with their in-house brokerage divisions.
In the first case, the SEC found that ARS failed to re-evaluate whether it was providing best execution for its advisory clients when it negotiated more favorable terms with its clearing firm. As a result, ARS retained a greater share of client commissions. The firm failed to implement policies and procedures reasonably designed to prevent its best execution violations. ARS has agreed to pay more than $1 million to settle the charges.
In the second case, Goelzer and GIM made misrepresentations in the firm’s Form ADV about the process of selecting itself as broker for advisory clients. GIM failed to seek best execution for its clients by neglecting to conduct the comparative analysis of brokerage options described in its Form ADV, and recommended itself as broker for its advisory clients without evaluating other introducing-broker options as the firm represented it would. Goezler and GIM agreed to pay nearly $500,000 to settle the charges.
Investor Relations Exec Charged With Insider Trading by SEC
Stephen Gray, the former CEO of a Houston-based investor relations firm, was charged by the SEC with insider trading of at least six of his firm’s clients’ securities.
Gray was privy to inside information, since his firm worked with companies to draft and publish press releases announcing quarterly and annual earnings, mergers and acquisitions, and other major events. Asked by employees for advice on the preparation of these documents, he came by inside information–and when it didn’t come unsolicited, Gray asked for it. He also sometimes met directly with clients to discuss confidential information.
He opened a trading account in September of 2009 and used inside information about clients that included The Men’s Wearhouse and Powell Industries to take in profits and avoid losses of more than $313,000 during a 13-month period. When his firm found out he was being investigated by the SEC last October, he was fired.
The SEC seeks a final judgment ordering him to disgorge all ill-gotten gains with prejudgment interest and pay financial penalties, as well as permanent injunctive relief.
Santander Official, Judge in Spain Charged With Insider Trading
A former high-ranking official at Madrid-based Banco Santander S.A. and a former judge in Spain have been charged by the SEC with insider trading, based on nonpublic information about a proposed acquisition for which the Spanish investment bank was acting as an advisor.
Cedric Cañas Maillard served as an executive advisor to Banco Santander’s CEO. He learned confidentially that the bank was advising BHP Billiton, one of the world’s largest mining companies, and helping to underwrite its proposed acquisition of Potash Corp., one of the world’s largest producers of fertilizer minerals.
Before the acquisition was publicly announced, Cañas not only bought Potash contracts-for-difference–highly leveraged securities not traded in the U.S. but based on the price of U.S. exchange-listed Potash stock and mirroring the stock’s movement and pricing–but also tipped his close personal friend Julio Marín Ugedo about the potential acquisition and advised him to purchase Potash stock. After the announcement became public, Cañas and Marín sold their Potash securities for a total of nearly $1 million.
The SEC seeks disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and orders of permanent injunction against Cañas and Marín; its investigation is continuing.
JPMorgan Settles With FERC for $410 Million on Energy Price Manipulation
After the Federal Energy Regulatory Commission issued a notice of alleged violations concerning JPMorgan’s trading practices in the electricity market from 2010 to 2012, the bank has agreed to settle for a total of $410 million.
The regulator said it had found twelve “manipulative bidding strategies" used by a JPMorgan affiliate in energy markets in California and the Midwest that resulted in tens of millions of dollars in overpayments from grid operators in the region. In the order posted on its website, the FERC said that JPMorgan had “employed a fraudulent device, scheme or artifice, made false statements or material omissions, or engaged in a course of business that operated or would operate as a fraud on electricity market participants.”
Of the $410 million, $285 million is a civil penalty and $125 million is “ill-gotten profits” that are to be returned to electricity ratepayers, according to the FERC.
Labor Department Wins Temporary Injunction Against Plan Fiduciaries
George Hofmeister and Bernard Tew, fiduciaries of four Lexington, Ky.-based pension plans, were the targets of a temporary injunction obtained by the Labor Department after allegations of improper use of retirement funds.
Hofmeister was the trustee of the four pension plans, Hillsdale Salaried, Hillsdale Hourly, Revstone Casting Fairfield GMP Local 359, and Fourslides Inc., and Tew was managing director of their investment service provider, Bluegrass Investment Management LLC. Hofmeister has been removed by the court order as a fiduciary of the plans; he is also prohibited from taking any actions with respect to the pensions plans or their assets. Tew resigned as fiduciary of the plans a few days before a hearing regarding the department’s motion.
Lawsuits previously filed by the Labor Department alleged that the defendants–Hofmeister and Tew, as well as others–engaged in a series of prohibited transactions, resulting in the misuse of approximately $12.1 million from the Hillsdale Salaried pension plan, approximately $22.5 million from the Hillsdale Hourly pension plan, approximately $4.4 million from the Revstone Casting Fairfield GMP Local 359 pension plan, and approximately $500,000 from the Fourslides Inc. pension plan. The four plan sponsors are closely affiliated with Lexington-based Revstone Industries LLC and Spara LLC.
The prohibited transactions included prohibited loans to related companies, prohibited use of plan assets for the purchase and lease of employer property, prohibited purchase of customer notes from affiliated companies, prohibited transfer of assets in favor of parties-in-interest, payment of excessive fees to services providers, and payment of fees on behalf of the companies. These activities began, according to the suits, within days or months of Hofmeister assuming control of the pension plans.
The court has appointed Fiduciary Counselors Inc. to administer the four pension plans.
Check out last week's SEC, DOL Enforcement: Cohen’s SAC Capital Faces Criminal Charges at ThinkAdvisor.