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.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
Among recent enforcement actions by the SEC were sanctions by the SEC imposed on an audit firm and four accountants for failed audits; the findings by an administrative law judge that three former brokers were guilty of churning and their supervisor at the time of failing to supervise them.
FINRA took action on a firm’s misuse of escrow funds and fines a firm over failure to respond to red flags.
FINRA Fines Firm for Ignoring Red Flags
FINRA censured CFD Investments Inc., of Kokomo, Ind., and fined it $100,000 for failing to respond to red flags relating to a former registered representative. Had it responded and investigated the situation, it could have discovered that the representative had converted a trust’s assets.
The firm was already aware that the representative was serving as both trustee and broker to the trust, a potential conflict of interest that allowed him to be the only one receiving statements — a perfect cover for any potential wrongdoing. He took advantage of the fact to hide his activities from the trust beneficiary and anyone else associated with the trust.
As soon as six months after purchase, the representative began to liquidate mutual funds held by the trust, and within about five years the accounts were essentially worthless — something the firm could have stopped, since it had access to the account activity. But it did nothing to investigate, despite numerous red flags, including the facts that the representative made very little money — in one year as little as $5,600 — from the firm during the time he was draining the trust, and that he also repeatedly violated firm procedures.
The firm neither admitted nor denied FINRA’s findings, but consented to the sanctions.
Audit Firm, Four Accountants Sanctioned by SEC
New York-based audit firm Sherb & Co. LLP, its founder, two other partners and an audit manager were sanctioned by the SEC for their roles in the failed audits of three China-based companies publicly traded in the U.S.
The SEC found in an investigation that the firm and its auditors, far from conducting audits in accordance with U.S. standards, were so far off the mark that one of the companies they audited, China Sky One Medical Inc., has been charged by the agency with financial fraud.
The flawed audits involved China Sky One Medical, China Education Alliance Inc. and Wowjoint Holdings Ltd. Those responsible for the audits were Steven Sherb, the audit firm’s founder; partners Christopher Valleau and Mark Mycio; and audit manager Steven Epstein. They four did not properly plan and execute the audits, nor did they get adequate documentation concerning sales, revenue or bank balances. In addition, they ignored red flags and failed to maintain complete audit work papers.
To settle the proceeding, the firm and the four auditors agreed to be barred from practicing as accountants on behalf of any publicly traded company or other entity regulated by the SEC; in addition, the firm agreed to pay a $75,000 penalty.
Brokers Churned, Supervisor Failed, Says Judge in SEC Case
Three former brokers from Atlanta-based brokerage firm J.P. Turner & Co., charged last year for churning, were found on Wednesday by an administrative law judge to have done so.
As reported by ThinkAdvisor, the SEC filed charges last year against the brokers, Ralph Calabro, Jason Konner and Dimitrios Koutsoubos, and their supervisor, Michael Bresner, as well as the firm’s president and the firm itself. The brokers were charged with churning the accounts of customers with conservative investment objectives, causing the customers to lose $2.7 million.
In his decision, the judge found that the three had indeed churned accounts, and ordered them to collectively pay disgorgement and prejudgment interest of more than $400,000 and penalties totaling $435,000.
In addition, the judge’s decision included finding that Bresner, who had been charged with compliance failures, had failed to supervise two of the brokers, Konner and Koutsoubos. At the time of the charges, Bresner was the firm’s head supervisor.
The firm and its president, William Mello, settled the charges against them last year without admitting or denying them. The firm paid $200,000 in disgorgement (J.P. Turner’s approximate share of the commissions and fees generated by the fraudulent churning) plus $16,051 in prejudgment interest and a $200,000 penalty, and agreed to hire an independent consultant to review the firm’s supervisory procedures in order to prevent future violations.
Mello was ordered to pay a $45,000 penalty, and in addition was suspended from association in a supervisory capacity with a broker, dealer, or investment advisor for five months.
Weybridge, Vt.-based Middlebury Securities LLC and its registered principal James Baldwin Robinson were censured and fined by FINRA after the agency found that the firm, acting through a registered representative, took $200,000 in escrowed customer funds given to the firm for investment in issuers’ offerings and used it instead to make payments to, or on behalf of another issuer, when this issuer had no authority to receive funds from the others under the terms of each of these offerings.
The registered representative raised approximately $5.09 million from investors through the sale of issuers’ offerings, lying or omitting material facts in connection with them. Investors never got any interest payments from the issures, and only a few were lucky enough even to get back their principal.
Robinson, meanwhile, was supposed to supervise the representative, and should have made sure he complied with applicable securities laws and the firm’s WSPs. Instead, he and the firm failed to review the rep’s selling activity and the way he handled customer funds via the escrow accounts, and disregarded red flags that should have alerted him to inappropriate actions. Because Robinson failed to keep an eye on the rep’s release of funds from those accounts, the rep was able to have access to the money and convert it on behalf of the other issuer.
Without admitting or denying the findings, the firm accepted a fine of $325,000 and Robinson $45,000; in addition, Robinson was suspended for a year and required to requalify as a general securities principal prior to the suspension being lifted.
Check out SEC Enforcement: RBS Securities to Pay $150M for Misleading Investors on ThinkAdvisor.