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.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
Massachusetts securities regulators said Thursday that they fined and censured Merrill Lynch and Sentinel Securities for supervisory failure.
Merrill Lynch (BAC) will pay a $500,000 fine for its lack of oversight of Jane O'Brien, a former registered rep who is serving a 33-month sentence.
In May, a federal court in Massachusetts charged the 60-year-old advisor with securities fraud for getting a client to sign a fictitious promissory note for $500,000, on which the client paid $240,000 to a third party who transferred the money to O’Brien, regulators say.
According to state authorities, O'Brien was a top producer: She received an upfront promissory note of nearly $1.2 million when she joined the firm and moved about $154 million in assets to Merrill; she made nearly $904,000 in gross revenue for the firm during her first year with the Wall Street-based broker-dealer.
But she clearly had financial troubles and nearly depleted her own IRA and non-IRA accounts of more than $380,000, which later prompted supervisors to look into a situation that had put several clients at risk.
It wasn't until early 2012, after a customer complaint, that Merrill Lynch managers discussed those loans with the clients, the regulators said. The loans were not made through Merrill Lynch accounts, according to the brokerage firm, and were made both while O’Brien was at Citi and after she joined Merrill Lynch.
“By the time she was questioned about her financial withdrawals, she had already borrowed money from her clients, which is in violation of state securities laws,” said Commonwealth Secretary William Galvin. “This, in my estimation, is yet another example of top producers often being held to a different standard because of the revenue they bring into the firm.”
In the settlement, Merrill Lynch agreed to offer reimbursement to these clients, who were told by O’Brien that they were being offered shares of an interest-bearing note that could be converted to stock in a privately held software company.
The then-advisor kept the money to cover personal expenses. She also borrowed about $1.7 million from a client, in violation of securities industry rules and Merrill Lynch’s own internal policies, and paid back only a fraction of that amount, federal authorities said in May.
“When we became aware of the matter two years ago and began investigating it, the then-financial advisor resigned,” said a Merrill Lynch spokesperson in a statement. “We will reach out again to clients to address any remaining issues.”
In a separate case, Sentinel Securities of Reading, Mass., was fined $50,000 for its lack of oversight of Brett Michael Letourneau of Beverly, an operations manager who misappropriated some $245,000 from the firm to his own account between 2006 and 2011.
Sentinel’s chief compliance officer told regulators about this situation in June 2012, several weeks after suing Letourneau.
“Our situation occurred in 2012, when an employee stole money from our company, not from any of our clients,” said John Carnevale, president and CEO of Sentinel Benefits & Financial Group, in an interview with ThinkAdvisor. “It was an employee embezzlement situation from our commission accounts.”
Letourneau was prosecuted and is now in jail, Carnevale says.
“We were the victim of a crime, and the state decided to take the opportunity to fine us for something,” he explained. “The case has nothing to do with our advisory firm or business, but only with the broker-dealer.”
Check out Massachusetts Fines Citigroup Global $30M Over Leaked Research on ThinkAdvisor.