More On Legal & Compliancefrom The Advisor's Professional Library
- The New and Improved Form ADV Whether an RIA is describing its investment strategy in advertisements or in the new Form ADV Part 2, it is important the firm articulates material risks faced by advisory clients and avoids language that might be construed as a guarantee.
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
Barclays Capital has not been having an easy time of late. After a recent $3.75 million penalty for email failures, the Financial Industry Regulatory Authority fined and censured the firm for failure to comply with the Municipal Securities Rulemaking Board rules on reimbursement of voluntary payments to a municipal securities association.
In addition, FINRA took to task J.P. Morgan Securities over aggregation of positions in securities to determine net positions of its aggregation units (AGUs), as well as over reporting failures.
Meanwhile, the SEC and Justice Department fined Alcoa $384 million for violating the Foreign Corrupt Practices Act (FCPA).
Alcoa Fined $384 Million for Bribing Bahrainian Officials
Global aluminum producer Alcoa Inc. was charged by the SEC with violating the Foreign Corrupt Practices Act (FCPA) when its subsidiaries repeatedly paid bribes to government officials in Bahrain to maintain a key source of business. The company agreed to settle the SEC's charges, as well as a parallel criminal case brought by the Justice Department, and will fork over $384 million in penalties.
Alcoa provides not just primary (fabricated) aluminum, but also smelter-grade alumina, from which smelting plants produce aluminum. According to the SEC, from 1989 to 2009, one of Alcoa's largest customers for bauxite and alumina refining was Aluminium Bahrain B.S.C. (Alba), which is considered one of the largest aluminum smelters in the world. Alba, controlled by Bahrain’s government, was supplied by alumina that was sourced from Alcoa’s mining operations in Australia.
Alcoa’s Australian subsidiary brought in a London-based consultant with ties to Bahrain's royal family to assist in negotiations for long-term alumina supply agreements with Alba and Bahraini government officials, said the SEC. A manager at the subsidiary described the consultant as “well versed in the normal ways of Middle East business” and one who “will keep the various stakeholders in the Alba smelter happy…”
The Australian subsidiary ignored red flags to bring in this intermediary, and the consultant generated the funds needed to pay bribes to Bahraini officials. Money used for the bribes came from the commissions that Alcoa’s subsidiary paid to the consultant, as well as from price markups the consultant made between the purchase price of the product from Alcoa and the sale price to Alba.
Through this arrangement, more than $110 million in corrupt payments were made to Bahraini officials with influence over contract negotiations between Alcoa and Alba. Recipients of the corrupt payments included senior Bahraini government officials, members of Alba’s board of directors, and Alba senior management. Alcoa's internal controls were insufficient to prevent or detect the bribes, which went down in Alcoa's books and records as legitimate commissions or sales to a distributor.
Alcoa will pay $175 million in disgorgement of ill-gotten gains, of which $14 million will be satisfied by the company’s payment of forfeiture in the parallel criminal matter. Alcoa also will pay a criminal fine of $209 million.
FINRA Hits Barclays on Securities Association Payment Reimbursements
Barclays Capital Inc. was censured by FINRA and fined $200,000, of which $25,983.60 will go to securities issuers as reimbursement. The agency found that Barclays was unfairly recompensed from the proceeds of municipal and state bond offerings for fees it paid voluntarily to a securities association.
Without admitting or denying the findings, Barclays consented to FINRA's sanctions after the agency found the firm to be a member of certain municipal securities associations, and that, although it assessed reimbursement for fees to a certain association from bond offering proceeds, the money that it got back wasn't directly related to any activities connected with the bond offerings, and on top of that, the firm wasn't required to belong to the association in order to underwrite the offerings.
That didn't stop Barclays from treating the funds as expenses of the transactions and requesting, and receiving, reimbursement from the proceeds of the offerings. Barclays also, not just on its own behalf but also on the part of the other members of the underwriting syndicate, listed those funds as actual expenses associated with the underwriting such as travel, printing and phone expenses.
FINRA determined the firm's requests for reimbursement to be unfair "because they were not accompanied by adequate disclosure to issuers about the nature of the fees."
FINRA also found that Barclays' practice of being reimbursed in this manner resulted in "the expenditure of the proceeds of municipal and state bond offerings to an organization that engaged in political activities, including hiring a lobbyist to monitor political developments and advocating, from time to time, for various legislative action. To date, in response to a request from the Treasurer of the State ofCalifornia, the firm has returned $42,158.30 to multiple issuers, as a refund for the municipal securities association underwriting assessments that were reimbursed from offering proceeds."
FINRA found Barclays to have failed to have written supervisory procedures (WSPs) that would have kept it in compliance in this area. It also failed to monitor how the municipal securities associations used the money the firm paid to them, something that was particularly necessary, said the agency, because of the associations' political activities.
J.P. Morgan Securities Censured, Fined for AGU-Related Failures
FINRA censured J.P. Morgan Securities LLC and fined it $375,000, as well as requiring it to revise its WSPs, over the firm's failure to accurately account for its aggregation units' (AGUs') total net positions.
The firm's trading desks, said FINRA, were organized into separate AGUs to comply with SEC Rule 200(f) and preexisting guidance concerning the proper use of AGUs. Each of those AGUs had numerous trading books, and securities positions were netted together for those books to determine the total net position of that AGU and, thus, whether the AGU’s orders should be marked long or short.
However, in addition to the firm’s proprietary positions, the AGUs also improperly included the trading positions of the nonbroker-dealer affiliate in determining the AGUs’ net positions. The nonbroker-dealer affiliate’s trading positions were incorporated into seven separate AGUs maintained by the firm, and as a result, the firm’s AGUs failed to accurately reflect the correct positions within the appropriate trading books.
The firm also failed to have a written plan of organization for the AGUs that would accurately provide determination of the overall net position of the securities traded by the AGUs. In addition, FINRA found that the firm failed to have supervision that would have ensured compliance.
The firm neither admitted nor denied the findings.
J.P. Morgan Censured, Fined $100,000 on Transaction Reporting Failures
FINRA also hit J.P. Morgan Securities with another fine, this time of $100,000, and censure for its failures to to transmit to the Over-the-Counter Reporting Facility (OTCRF) last sale reports of transactions in OTC equity securities within 90 seconds after execution, as required.
Instead, the firm incorrectly designated as “.U” to the OTCRF last sale reports of transactions in OTC equity securities, failed to designate as “.W” to the OTCRF last sale reports of transactions in OTC equity securities, and reported to the OTCRF last sale reports of transactions in OTC equity securities it was not required to report. It also failed to report the correct time to the OTCRF in last sale reports of transactions in OTC equity securities.
FINRA also cited other reporting failures in its findings; J.P. Morgan neither admitted nor denied them, but consented to their entry and to the fine.
Check out last week's Enforcement Roundup on ThinkAdvisor.