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.
- 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.
An appeals court ruled Tuesday to reinstate two of four claims in a lawsuit that New York state brought against Charles Schwab accusing the brokerage firm of falsely describing auction-rate securities as liquid investments without disclosing the risks.
According to Bloomberg, a four-judge appeals court panel reinstated two of the four claims in the case, securities fraud allegations based on the state’s Martin Act law, saying the attorney general’s office presented enough evidence for a trial.
“We find the Martin Act causes of action to be sufficiently pleaded given the fact that the statute is remedial and should be broadly construed in order to attain its beneficial purpose,” Bloomberg quoted Justice Richard Andrias as writing. “Under the statute, the word ‘fraud’ is broadly defined so as to embrace even acts which ‘tend to deceive the purchasing public.’ Based on this standard, the complaint sets forth actionable Martin Act claims notwithstanding the absence of a specific allegation that Schwab represented ARS to be liquid at times when they were illiquid.”
The Martin Act gives the New York attorney general extraordinary powers, more than other state regulators, to fight financial fraud.
The San Francisco-based brokerage was sued by then-Attorney General Andrew Cuomo in August 2009, and State Supreme Court Justice Justice O. Peter Sherwood granted Schwab’s motion to dismiss the case in 2011, Bloomberg reported.
The attorney general’s office sued on behalf of investors who bought the securities through Schwab.
According to Bloomberg, the company was accused of engaging in “fraudulent and deceptive conduct” and failing to disclose the risks involved in the investments.
Schwab argued that the complaint didn’t allege statements that were false when made or identify who made the misstatements, when and where they were made or how they were misleading, according to Sherwood’s order, as quoted by Bloomberg.
Sherwood said the complaint was “devoid of any allegation of misrepresentations made that were untrue when made,” noting that the attorney general’s office spent more than a year investigating before filing the suit, Bloomberg reported.
The appeals court, Bloomberg reported, said Sherwood based its conclusion on a finding that there had been no failures in the auctions in the 20 years preceding August 2007 and erroneously evaluated the merits of the claims.
However, Schwab told Bloomberg in a statement that it intends to fully defend its position and is confident the court will rule in its favor. About 98% of the auction-rate securities held by Schwab clients have been redeemed at par value, the company said in the statement.
“Unlike some other downstream brokerage firms, Schwab did not market or promote ARS, market or sell them to clients online or compensate its registered representatives for ARS transactions,” Schwab said in the statement. “Schwab’s role in these transactions was simply to accommodate clients when they asked for these types of products.”
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