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- Registration Requirements for Investment Advisor Representatives (IARs) When individuals launch an advisory firm, they must avoid marketing themselves or the firm as investment advisors before they are properly approved and registered. Otherwise, they are subject to severe penalties.
The Department of Labor and the Securities and Exchange Commission on Monday announced that they had reached a combined $21 million settlement with Legg Mason subsidiary Western Asset Management related to a purchase of prohibited securities that resulted in losses to the accounts of nearly 100 employee benefit plans and investment funds.
The SEC on Monday announced sanctions against the Pasadena, Calif.-based investment advisor for concealing investor losses that resulted from a coding error and engaging in cross trading that favored some clients over others.
The settlement and related SEC charges require Western Asset to restore a total of more than $17.4 million to employee benefit plans and other accounts and require the company to pay more than $3.6 million in penalties.
According to an SEC order instituting settled administrative proceedings, Western Asset serves as an investment manager primarily to institutional clients, many of which are ERISA plans.
“Western Asset breached its fiduciary duty by failing to disclose and promptly correct a coding error that caused the improper allocation of a restricted private investment to the accounts of nearly 100 ERISA clients,” the order states. “The private investment that was off-limits to ERISA plans had plummeted in value by the time the coding error was discovered, and Western Asset had an obligation to reimburse clients for such losses under the terms of its error correction policy. Instead, Western Asset failed to notify its ERISA clients until nearly two years later, long after the firm had liquidated the prohibited securities out of those client accounts.”
The DOL said in announcing the settlement that the investigation found that from Jan. 31, 2007, through June 12, 2009, Western Asset used funds from accounts covered by the Employee Retirement Income Security Act to purchase approximately $90 million of securities that were prohibited for purchase and ownership by such accounts.
“Specifically, Western Asset purchased Glen Meadow Pass-Through Trust Securities for 99 ERISA-covered accounts that were under its management. The investigation determined that the company’s own compliance system recognized that the terms of the securities prohibited their ownership by ERISA-covered entities. However, Western Asset overrode the system, allowing the accounts to improperly purchase and hold the securities in their portfolios,” according to DOL.
DOL determined that the company’s management and compliance personnel became aware of the issue by October 2008, but failed to immediately correct the error or inform their clients about the situation. “This violated the company’s own policies,” DOL said. “The accounts continued to hold the prohibited securities until June 2009, at which time they were sold, resulting in significant losses.”
DOL said that its investigation also found that from 2007 through 2010, Western Asset arranged 514 cross-trades involving ERISA-covered accounts. “Western Asset sold fixed-income securities from client accounts, including ERISA-covered accounts, to various broker-dealers. The company then repurchased the same securities from the same broker-dealers on behalf of different clients at a mark-up and without obtaining independent offers.”
Cross-trade transactions are prohibited by ERISA, except under certain circumstances, to protect employee benefit plans from an investment manager’s conflicts of interest. The department’s investigation determined that as a result of unfair pricing involving these cross-trades, certain ERISA-covered accounts suffered more than $6 million in losses.
“Western Asset violated its fiduciary duty to act solely in the best interest of its plan clients,” said Assistant Secretary of Labor for Employee Benefits Security Phyllis Borzi, in a statement. “Its failure to follow not only the law, but its own rules, cost hard-working employees millions of dollars.”
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