More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- 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.
Among recent actions by the SEC was the charging of a self-styled money manager for free-riding and fraud, while FINRA took on failures in WSPs and OATS compliance.
SEC Files Charges in Free-Ride Case
According to the SEC, Ronald Feldstein went for a free ride — literally — in a Bentley, thanks to a scheme in which he defrauded investors of almost half a million dollars and cost three brokerage firms more than $2 million.
Feldstein was charged by the SEC for a free-riding scheme in which he bought securities he never intended to pay for, should they prove unprofitable, and that he planned to pay for out of sales profits if the stocks went up. Instead, he planned to refuse to issue instructions to settle the trades and just walk away, leaving the broker-dealers holding the unprofitable positions.
He carried out this charade by means of three separate brokerage accounts in the names of two investment funds that he made up: Mara Capital Management and Vita Health of America. This lasted from September 2008 until February 2009.
Later in 2009, he tried a different strategy. He started pursuing longtime business acquaintances, among them a dry cleaner and a car leasing and servicing company. As a decades-long customer, he managed to persuade them to “invest” with him, offering such opportunities as a successful hedge fund, a promising penny stock, and a fashion company’s initial public offering.
But Feldstein took their money — some $450,000 — and ran, to the Hamptons and on gambling junkets, and to buy the aforementioned Bentley. The money never even made it into an investment account; he either deposited his investors’ funds into his own personal account or into another account belonging to an entity he owned that allowed him to spend the funds as he pleased.
The SEC charged Feldstein, Mara Capital and Vita Health of America. Trademore Capital Management was also charged as a relief defendant.
FINRA Fines G Research $1 Million on WSP Failures
G Research, formerly Gabelli & Co., was censured and fined $1 million by FINRA for written supervisory procedures that the agency said were not reasonably designed to bring about compliance with securities laws and regulations and NASD and FINRA rules when it came to private partnerships formed by firm registered representatives. FINRA also said the firm did not adequately supervise the private partnerships.
The WSPs did not provide adequate supervision on due diligence related to the hedge funds and funds of funds that were frequently offered to clients by the private partnerships. Among other shortcomings, the WSPs failed to provide specific guidance regarding the relative fees to be charged by the private partnerships. Contracts for private partnership investors obligated them to pay additional fees to invest with an affiliated advisor through a private partnership, but the WSPs contained no guidance on those fees, or when waivers to an investment minimum might be obtained.
There was also a failure to provide guidance on obligations imposed when members sell hedge funds and funds of hedge funds. The firm did not adequately evaluate a provision in the fund of funds’ subscription agreements that disavowed its obligation to perform due diligence on the fund manager.
In addition, the firm did not enforce its own WSPs with regard to the formation, operation, marketing and sale of the private partnerships, including supervisory review of sales materials. That resulted in failure to approve the sales materials being used for the private partnerships before they were used, and failure to provide statements of securities held by the private partnerships to mandated firm departments. It also meant that insufficient disclosure in the documents disguised risks.
The firm neither admitted nor denied the findings, but consented to the censure and fine.
FINRA Hits Wedbush on OATS, WSPs
In two separate actions, FINRA censured and fined Wedbush Securities Inc. for failures in Order Audit Trail System reporting and supervision and for failures in its written supervisory procedures.
In the first case, the fine was $750,000, and the firm was required to bring in an independent consultant to review and suggest modifications to its OATS reporting and supervisory procedures.
According to FINRA’s findings, for approximately 18 months, Wedbush failed to transmit approximately 1.6 billion ROEs to OATS; that constituted the overwhelming majority of its OATS reporting obligation for the period. Also, during four different review periods, the firm submitted approximately 270 million ROEs late; it consistently logged late reporting violation rates many times higher than its peer group and industry averages. It also failed to repair and resubmit more than 12.7 million ROEs that were rejected because of context and system errors.
The firm had more than 45 million order reports that OATS was unable to link to the related order routed to Nasdaq or to the corresponding New Order Report because of inaccurate, incomplete or improperly formatted data. Also, for more than two years, the firm had violations for non-reporting, over-reporting, late reporting, failure to repair repairable rejected ROEs within the required time period, and failure to populate the proper ROE reconciliation identifier on resubmitted ROEs.
It also did not consistently conduct required daily and monthly supervisory reviews and failed to maintain required daily and monthly supervisory logs. Moreover, its supervisory system was designed to correct errors as they occurred instead of preventing them and being in compliance with OATS rules.
Also included in this particular instance was the fact that the firm’s vice president in charge of correspondent services was not properly registered during a 34-month period.
In the second case, for which the firm was fined $72,500 and required to revise its WSPs, FINRA found that it failed to provide written notification disclosing to its customers its correct capacity in transactions and the reported price. It made available reports that included incorrect information, and its supervisory system was not adequate to ensure compliance.
In addition, there were other failures, including a lack of supervisory review for trade reporting and other rules as well as failure to provide accurate information to customers on transaction capacity, correct pricing and average pricing detail; to properly mark sale orders as short, which meant that it failed to report transactions in reportable securities to the Trade Reporting Facility (TRF) with a short sale indicator; and to show the correct order entry time and the correct long/short sale indicators in its proprietary trading ledger.
In both cases, the firm neither admitted nor denied the findings, but agreed to the censures and fines.