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.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
Among recent enforcement actions was FINRA’s action against Banorte-Ixe Securities International for its failure to act when a client with reported ties to a drug cartel moved $28 million through a corporate account.
In addition, the SEC charged a Chicago-based accountant with conducting insider trading in his wife’s account and charged Scottrade with failing to provide the agency with complete and accurate blue sheet data.
SEC Fines Money Manager for Misleading Ads
The SEC charged Mark Grimaldi and his New York-based firm, Navigator Money Management (NMM), with making false claims through Twitter, newsletters and other communications about the success of their investment advice and a mutual fund they manage.
According to the SEC, they selectively touted the past performance of the Sector Rotation Fund (NAVFX) and specific securities recommendations they made to clients, cherry-picking highlights and omitting less favorable recommendations and other data that would have made the facts complete.
Grimaldi is majority owner, president and chief compliance officer of NMM, based in Wappingers Falls, N.Y. He made particular use of a newsletter called The Money Navigator to solicit clients for NMM and investors for the Sector Rotation Fund. The Money Navigator had more than 60,000 subscribers.
In 2008, the SEC examined NMM and a fund it managed, and notified NMM that the newsletters could be considered advertisements under Rule 206(4)-1, which generally prohibits false or misleading advertisements by investment advisors. SEC staff also noted that the newsletters could be considered advertisements under Rule 482, which governs advertisements for mutual funds and other investment companies and has specific requirements for ads containing performance data.
In one example of how they presented themselves, NMM and Grimaldi misleadingly claimed in a December 2011 newsletter that NAVFX was “ranked number 1 out of 375 World Allocation funds tracked by Morningstar.” However, only during the period of Oct. 13, 2010 to Oct. 12, 2011 did the fund manage to achieve that position, when during other time periods NAVFX had a poorer relative performance. From Jan. 1 to Nov. 30, 2011, in fact, the day before Grimaldi published the ad, at least 100 other mutual funds in that same Morningstar category outperformed NAVFX.
There were other similarly misleading advertisements, including some that falsely touted Grimaldi’s own money management performance.
While neither admitting nor denying the charges, Grimaldi and his firm have agreed to settle. Grimaldi agreed to pay a penalty of $100,000, and he and the firm agreed to be censured and comply with certain undertakings including the retention of an independent compliance consultant for three years.
Banorte-Ixe Securities Fined on AML, Registration Failures
FINRA announced that it has fined New York-based Banorte-Ixe Securities International Ltd., which serves Mexican clients investing in U.S. and global securities. The firm was fined $475,000, and its former anti-money laundering officer and chief compliance officer, Brian Anthony Simmons, was suspended for 30 days in a principal capacity.
The action was taken, according to FINRA, because the firm failed to have adequate anti-money laundering (AML) systems and procedures in place, and also failed to register approximately 200 to 400 foreign finders who interacted with the firm's Mexican clients. Simmons was suspended because he was responsible for the firm's AML procedures and for monitoring suspicious activities.
As a result of the firm's AML compliance failures, Banorte Securities opened an account for a corporate customer and did not detect, investigate or report the suspicious rapid movement of $28 million in and out of the account. Had the firm looked into the movement of funds even with a Google search, it would have learned that one of the owners of the corporate account had been arrested by Mexican authorities in February 1999 for alleged ties to a Mexican drug cartel.
The firm’s AML program exhibited three failures, according to FINRA. First, the firm did not properly investigate some suspicious activities. Second, instead of using a program tailored to its business, it used off-the-shelf procedures that were inadequate to detect problems inherent in accounts for customers in the high-risk jurisdiction of Mexico. Third, the firm didn’t enforce its written AML procedures.
FINRA also found that from Jan. 1, 2008, to May 9, 2013, the firm failed to register 200–400 foreign finders. Prior to 2006, the firm had registered individuals who performed the services rendered by foreign finders — people who referred customers to the firm’s Mexican affiliates, but also performed various activities requiring registration as an associated person, including discussing investments, placing orders, responding to inquiries, and in some instances, obtaining limited trading authority over customer accounts.
In settling with FINRA, Banorte Securities and Simmons neither admitted nor denied the charges, but consented to the entry of the findings.
SEC Charges Accountant With Insider Trading in Wife’s Account
The former director of internal audit at a Chicago-based health care information technology company was charged by the SEC with insider trading ahead of the release of the firm’s financial results, which made him more than a quarter-million dollars in illicit profits. He was also charged in a parallel criminal action.
CPA Steven Dombrowski confidentially learned through his job at Allscripts Healthcare Solutions that first-quarter 2012 financial results were much worse than expected and the company would miss its earnings target. Despite a company-imposed blackout period on trading its securities, Dombrowski used his wife’s account to trade Allscripts securities ahead of the bad news and profit on the nonpublic information.
Dombrowski sold short 1000 shares of Allscripts stock in the weeks leading up to the release of Q1 earnings. He also bought more than 510 Allscripts put option contracts that would be profitable only if the company’s stock price went down. The Q1 results, announced on April 26, 2012, included earnings per share that were only about 50% of analyst estimates. Allscripts also announced the impending departure of its chief financial officer for another job, as well as the resignations of the chairman of the board and several board members.
Right after the Q1 results were released, Dombrowski bought Allscripts stock to close his short position. The next day he sold all his options positions. The company’s common stock fell about 35.7% on April 27, and his insider trading brought in profits of $286,211.55.
The SEC seeks disgorgement of ill-gotten gains plus prejudgment interest and a penalty. Dombrowski’s wife, Lisa Fox, has been named as a relief defendant for the purposes of recovering disgorgement plus prejudgment interest for the illegal trades made in her account.
Scottrade Settles Blue Sheet Charges With SEC for $2.5 Million
The SEC charged Scottrade with failing to provide the agency with complete and accurate information about trades done by the firm and its customers. Such data is commonly known as “blue sheet” data, so called because of the color of the forms originally provided to broker-dealers for completion and submission to the SEC.
According to the SEC, broker-dealers like Scottrade are required upon request to electronically provide the agency with blue sheet data so it can be used to identify and analyze trades in the course of investigations and other work. Blue sheets contain the details of each equity or options trade that is routed through clearing broker-dealers. The process moved from paper to electronic submissions in the 1980s.
In December, 2011, SEC staff sent electronic blue sheet requests to Scottrade in connection with an agency investigation into suspicious trades made in a Scottrade online brokerage account that was the apparent victim of account intrusion. SEC staff discovered that the blue sheet information Scottrade provided was incomplete; it failed to include data from a number of trades that resulted from unauthorized account intrusions. When SEC staff contacted Scottrade about the omissions, the firm told the agency that a computer coding error was responsible.
That coding error resulted in the omission of trades from blue sheet responses from March 2006 to April 2012—a total of six years and 1,231 instances. Scottrade has now corrected the code.
In addition to paying the $2.5 million penalty, Scottrade admitted violating the recordkeeping provisions of the federal securities laws. It also agreed to undertake remedial measures that include the retention of an independent consultant to review its supervisory, compliance, and other policies and procedures designed to detect and prevent securities laws violations related to blue sheet submissions.
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