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.
- Proxy Voting RIAs are not required to vote proxies on behalf of their clients. However, when an RIA does assume responsibility for voting proxies, the firm’s policies and procedures should help to ensure that votes are cast in the best interest of clients.
Securities and Exchange Commission Chairwoman Mary Jo White told securities lawyers Wednesday that while the “headline-grabbing” cases against large firms and high-profile CEOs are important, it is often the “less sensational” actions taken by the agency that best embody the regulator’s “unrelenting efforts” to protect investors.
White told securities lawyers at the Practicing Law Institute’s 45th Annual Securities Regulation Institute in New York that in the financial crisis arena alone, the SEC brought actions against more than 160 individuals and corporate entities, resulting in more than $2.7 billion in disgorgement and penalties, nearly all of which she said would be returned to harmed investors.
Of the individuals charged, more than 60 were CEOs, CFOs or other senior corporate executives, with more than 30 of them being barred from the securities industry or from serving as directors or officers of public companies.
While these cases were being brought, White said, “we were filing literally thousands of other cases in other areas,” cases and settlements that didn’t make “a big splash” or include “impressive statistics.”
Many of the SEC’s cases, White continued, “you never hear about, but they are no less meaningful and not just to the parties involved, but also to the functioning of our markets.”
White highlighted three such cases.
First was a case involving the Sisters of Charity, a Catholic organization located in the Bronx, “not far from Yankee Stadium, my home away from home,” White said, in which an SEC examiner noticed suspicious trading in the account by a Florida broker-dealer during a regular exam.
While these accounts held by the Sisters of Charity “were not huge accounts,” White said, “they were important to many people,” providing, among other things, “funding to help children and families in some of New York’s toughest neighborhoods.”
After noticing the unusual trading in the accounts, the SEC examiner reached out to a colleague in the SEC’s Enforcement Division “who had substantial expertise on the type of securities held and the type of trading that would be expected in such accounts,” White said. “Immediately, the attorney knew the matter was worth looking into to determine if the broker had been trading excessively in the accounts simply to generate fees, an unlawful practice that long ago was given the name ‘churning.’”
After further investigation, the SEC filed an action against the broker who had managed the account, and after several months of litigation, he agreed to settle, White said. "As a result, on Christmas Eve, an SEC staff attorney was able to place a call to the nun in charge of the Sisters of Charity to tell her that she would be receiving a very special present: the return of $350,000 to their account.”
The enforcement team also obtained an order permanently barring the broker from associating with other firms, a crucial action White said “helps protect against future harm.”
International Pyramid Scheme
Noting that much of the global work performed by the SEC’s Office of International Affairs is “unseen” by those outside the agency, White also relayed the case a matter of weeks ago that involved a business consisting of five entities located in Hong Kong, Canada and the British Virgin Islands that allegedly targeted Asian-Americans in what appeared to be a pyramid scheme.
The scheme’s operators, White said, were charged with “exploiting their close connections in the Asian-American community by using Internet videos, promotional materials and seminars to create the appearance of a legitimate enterprise.”
The SEC “asserted that the scheme falsely promised exponential, risk-free returns to investors from a venture that purportedly sold Internet-based children’s educational courses,” White said, but “our complaint charged that, in reality, the firm had no sales and no apparent source of revenue other than money received from new investors.”
The SEC alleged that the bulk of the $20 million invested with the company by more than 400 investors ended up in accounts controlled by executives and promoters of the company.
"With the assistance of the securities agencies in Hong Kong, Canada and Malaysia, the staff was able to amass the evidence needed to freeze the assets and obtain an order that will help us take steps to prevent the defendants from keeping the ill-gotten gains held overseas," she said.
White also noted that in 2011 the agency’s Chicago Regional Office set out to examine a number of regionally and nationally prominent broker-dealers engaged in municipal underwritings to see whether the broker-dealers had a process for determining that the bonds they were selling to investors were sound.
“Unfortunately, not only did many broker-dealers do an inadequate job of due diligence – if they conducted any at all – but several had decided not to keep records of their inquiries into specific offerings as required by the rules,” White said. “We were deeply concerned that this practice created significant risks for retail investors.”
As a result of the information gathered in these exams, the SEC exam program issued a risk alert reminding municipal underwriters of their obligations. “We did not bring a case and we did not write a new rule," White said. "But we believe that firms are now more likely to maintain due diligence files and improve the overall quality of the practices they use.”
Check out Former SEC Chairman Levitt: Mary Jo White a ‘Rock Star’ After SAC Plea on ThinkAdvisor.