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.
This week, FINRA fined a muni firm for improperly gifting sports tickets to client representatives and slapped Wells Fargo Advisors for failing to notice that a registered rep was making fund transfers from client accounts to bank accounts that were controlled by her or by a member of her family.
Meanwhile, the SEC hit a London-based hedge fund advisor and its former U.S.-based holding company with a fine of nearly $9 million over internal controls failures and went after a Ponzi scheme in Texas focused on oil and gas investments.
Gift Ticket Program Gets L.J. Hart Fined, Censured
FINRA censured L.J. Hart and Co. of St. Louis and fined the firm $200,000 after finding that it improperly gave sports tickets to municipal issuer representatives associated with its clients to the tune of $183,546.
According to FINRA, the municipal underwriting firm had a ticket-gifting program and bought season tickets for games of various sport teams, as well as tickets for playoff games or additional tickets for regular season games the firm believed municipal issuer representatives would enjoy. The firm gave the tickets to municipal issuer representatives associated with municipal entities that it considered the firm’s customers.
If a municipal entity chose to use another firm’s services, the firm no longer considered that entity a customer, and the municipal issuer representatives for that entity did not receive tickets from the firm. On the other hand, the municipal issuer representatives who were associated with clients that used the firm to underwrite multiple financing projects found themselves the recipients of multiple sets of tickets and more expensive tickets.
The firm's supervisory system was not designed to keep the firm in compliance with MSRB rules, nor did it properly state the requirements of MSRB Rule G-20. Instead, it ignored the part of the rule that says the exemption for occasional gifts of meals or tickets to theatrical, sporting and other entertainment only applies if such events are hosted by the broker, dealer or municipal securities dealer.
The firm’s written procedures also failed to mention how personnel would be supervised to be sure they did not exceed the $100 value limit per year when giving such perks to anyone in relation to the municipal securities activities of the recipient’s employer. Nor was anyone designated to supervise this limit.
The firm neither admitted nor denied FINRA's findings, but consented to their entry and to the fine.
London-Based Hedge Fund Advisor to Pay $9 Million on SEC Charges
London-based hedge fund advisor GLG Partners L.P. and its former U.S.-based holding company, GLG Partners Inc., were charged by the SEC with internal controls failures that led to the overvaluation of a fund’s assets and inflated fee revenue for the firms.
The GLG firms, according to the SEC, managed the GLG Emerging Markets Special Assets 1 Fund. From November 2008 to November 2010, GLG’s internal control failures caused the overvaluation of the fund’s 25% private equity stake in an emerging-market coal mining company, resulting in inflated fees to the GLG firms and the overstatement of assets under management in the holding company’s filings with the SEC.
GLG’s asset valuation policies required the valuation of the coal company’s position to be determined monthly by an independent pricing committee. But several times GLG employees got information that made the $425 million valuation for the coal company position dubious. However, policies and procedures were inadequate to insure that the information made it to the independent pricing committee.
Among GLG’s fund managers, middle-office accounting personnel and senior management, no one was sure about who was responsible for elevating valuation issues to the independent pricing committee.
While the firms neither admitted nor denied the charges, they agreed to pay a total of nearly $9 million — disgorgement of $7,766,667, prejudgment interest of $437,679 and penalties totaling $750,000 — and to hire an independent consultant to recommend new policies and procedures for the valuation of assets and test the effectiveness of the policies and procedures after adoption.
The SEC is establishing a Fair Fund to distribute money to harmed fund investors.
SEC Charges Firm, Freezes Assets in Oil and Gas Ponzi Scheme
The SEC has charged Robert Helms and Janniece Kaelin as the perpetrators of a Texas-based Ponzi scheme involving purported investments in oil and gas projects. In addition, the agency obtained an emergency asset freeze.
Also charged were Deven Sellers of Arvada, Colo., and Roland Barrera of Costa Mesa, Calif., in the illegal sale of investments for Helms and Kaelin without being registered with the SEC. They also allegedly misled investors about the sales commissions and referral fees they were receiving.
According to the agency, Helms and Kaelin, who work in Austin, began offering investments in 2011 through Vendetta Royalty Partners, a limited partnership that they control. They have since attracted at least 80 investors in more than a dozen states while promising in fraudulent offering documents that they would use more than 99% of the investment proceeds to acquire a lucrative portfolio of oil and gas royalty interests.
In reality, the two invested only about 10% of the proceeds to buy into projects that actually returned very little, using the rest of the money for personal and business expenses and to make Ponzi payments to earlier investors.
The two also failed to disclose litigation against them and companies they control; misrepresented the performance of the limited oil-and-gas royalty investments actually under their management; and failed to inform investors that Vendetta Royalty Partners was behind on its line of credit. The company ultimately defaulted.
The SEC said that Helms and Kaelin, along with Sellers and Barrera, told potential investors that any commissions or finder’s fees would be small. However, Sellers and Barrera each received more than $200,000 in such fees on one investment alone. Sellers and Barrera regularly solicited investments without being registered as brokers.
The agency seeks permanent injunctions as well as disgorgement of ill-gotten gains plus prejudgment interest and penalties.
FINRA Censures, Fines Wells Fargo Advisors Over Fund Transfers
Wells Fargo Advisors was censured by FINRA and fined $150,000 for failing to discover that a registered representative had transferred approximately $258,000 from various customer accounts into bank accounts that she or her family member apparently controlled.
FINRA said that the firm's supervisory system was not designed to catch such instances, since it was not reasonably designed to adequately review and monitor the transmittals of funds from customer accounts to third-party accounts and outside entities as required.
The firm neither admitted nor denied the findings.
Check out Merrill Fined $131.8M by SEC for Misleading CDO Investors on ThinkAdvisor.