More On Legal & Compliancefrom The Advisor's Professional Library
- 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.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
The Securities and Exchange Commission on Wednesday charged the holding company of Cincinnati-based Fifth Third Bank and its former chief financial officer with improper accounting of commercial real estate loans in the midst of the financial crisis in 2008, which had the effect of hiding greater losses on its books.
To settle the SEC’s charges, Fifth Third agreed to pay $6.5 million, and the bank’s former CFO, Daniel Poston, agreed to pay a $100,000 penalty and be suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.
According to the SEC’s order instituting settled administrative proceedings, Fifth Third experienced a substantial increase in “non-performing assets” as the real estate market declined in 2007 and 2008 and borrowers failed to repay their loans as originally required.
Fifth Third decided in the third quarter of 2008 to sell large pools of these troubled loans, the SEC's order states. "Once Fifth Third formed the intent to sell the loans, U.S. accounting rules required the company to classify them as ‘held for sale’ and value them at fair value. Proper accounting would have increased Fifth Third’s pretax loss for the quarter by 132 percent. Instead, Fifth Third continued to classify the loans as ‘held for investment,’ which incorrectly suggested that the company had not made the decision to sell the loans."
George Canellos, co-director of the SEC’s Division of Enforcement, said in a statement that “improper accounting by Fifth Third and Poston misled investors during a time of significant upheaval and financial distress” for the company. “It is important for investors to know the financial consequences of decisions made by management, so accounting rules that depend on management’s intent must be scrupulously observed.”
According to the SEC’s order, "Poston was familiar with the company’s loan sale efforts, which included entering into agreements with brokers during the third quarter of 2008 to market and sell loans. Despite understanding the relevant accounting rules, Poston failed to direct Fifth Third to classify and value the loans as required. Poston also made inaccurate statements to Fifth Third’s auditors about the company’s loan classifications, and certified the company’s inaccurate results for the third quarter of 2008,” the SEC states.
“By failing to classify large pools of loans as required, Fifth Third and Poston kept investors from knowing the full truth behind its commercial real estate loan portfolio,” added Stephen Cohen, an associate director in the SEC’s Division of Enforcement.
Fifth Third and Poston consented to the entry of the order finding that they violated or caused violations of Sections 17(a)(2) and (3) of the Securities Act of 1933 as well as the reporting, books and records, and internal controls provisions of the federal securities laws, the SEC states.
Without admitting or denying the findings, they agreed to cease and desist from committing or causing any violations and any future violations of these provisions.
Poston is suspended from appearing or practicing before the SEC as an accountant pursuant to Rule 102(e) of the Commission’s Rules of Practice with the right to apply for reinstatement after one year.