More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Conducting Due Diligence of Sub-Advisors and Third-Party Advisors Engaging in due-diligence of sub-advisors isnt just a recommended best practice it is part of the fiduciary obligation to a client. An RIA should be extremely reluctant to enter a relationship with a sub-advisor who claims the firms strategy is proprietary.
Among recent enforcement actions were SEC charges against an equity fund manager over misallocation of expenses. Also, FINRA censured and fined a firm $130,000 for short position reporting failures.
Equity Fund Manager, Firm Charged With Expense Misallocation
The SEC filed charges against Scott Brittenham and Clean Energy Capital LLC (CEC) in Arizona for putting together a scheme to misallocate fund expenses.
According to the SEC, Brittenham and his firm improperly paid more than $3 million of the firm’s expenses by using assets from 19 private equity funds that invest in private ethanol production plants. They also failed to mention that payment arrangement in fund offering documents.
When the money ran out to pay expenses, CEC and Brittenham loaned money to the funds — at rates favorable to themselves — and unilaterally changed how they calculated investor returns to benefit themselves.
Among the expenses the funds have been footing are such things as the firm’s rent, salaries, and other employee benefits such as tuition costs, retirement contributions and bonuses. Brittenham also used fund assets to pay 70% of a $100,000 bonus that he awarded himself. All this was in addition to millions in management fees that the funds were already paying to CEC.
As cash reserves shrank under this arrangement, CEC and Brittenham made “loans” to the funds — with interest rates as high as 17% — so that they could keep using fund money to pay expenses. That put the funds in jeopardy, since Brittenham had pledged fund assets as collateral.
But neither Brittenham nor the firm stopped there; they changed how the firm calculated distributions to investors so that they could pay out less. Brittenham also lied to one investor about how much “skin in the game” he had, claiming that he and CEC’s cofounder had each invested $100,000 of their own money in one of the funds. The actual amounts invested were only $25,000 each.
Among the charges filed by the SEC are willfull violations of the antifraud provisions of the federal securities laws, along with disclosure, compliance, custody and reporting violations.
FINRA Censures, Fines Firm on Short Position Violations
New York-based CIBC World Markets Corp. was censured by FINRA and fined $130,000 over short position reporting failures and was ordered to revise its written supervisory procedures (WSPs) on the matter.
According to the agency, for about five years, the firm netted, for short-interest reporting purposes, long positions held in trading accounts of a non-BD affiliate of the firm against short positions in the same securities held in the affiliate’s trading accounts. It then changed its short-interest reporting logic and began netting long and short positions across the affiliate’s multiple trading accounts.
Because of these actions, FINRA said, for about five years the firm reported incorrect short-interest positions. Later, the firm changed the logic in reporting short positions and stopped netting long and short positions, so that after a certain date, only Type 5 short positions were included in the firm’s short-interest reports, without regard to any offsetting positions in the same account, or long positions in any other account held by the affiliate.
In addition, the firm included certain positions held in the affiliate’s noncash collateral account in the firm’s short-interest reports. Because the positions held in these accounts did not result from short sales pursuant to Rule 200(a) of Regulation SHO, they were not reportable as short-interest positions, and the firm then reported incorrect short-interest positions.
The firm also failed to have in place WSPs and a supervisory system that would have kept the firm in compliance with regulations on short-interest position reporting.
While it neither admitted nor denied the findings, the firm agreed to the fine and entry of FINRA’s determination.
Barclays Capital Censured, Fined by FINRA
Barclays Capital Inc. was censured by FINRA and fined $115,000 for failing to report to the Trade Reporting and Compliance Engine (TRACE) the correct contraparty identifier for transactions and S1 transactions in TRACE-eligible securities. FINRA said that the firm failed to report to TRACE transactions, P1 transactions and S1 transactions in TRACE-eligible securities it was required to report. It also failed to report the correct execution time for P1 transactions in TRACE-eligible securities to TRACE; failed to show the execution time on brokerage order memoranda; and failed to preserve, for at least three years, the first two in an accessible place, some brokerage order memoranda.
FINRA also said that the firm failed to report S1 transactions in TRACE-eligible securities to TRACE within 15 minutes of the execution time. The firm also served as managing underwriter, other than a secondary offering, and failed to report such distribution or offering to FINRA within the time frame set forth by FINRA Rule 6760(c).
The firm neither admitted nor denied FINRA’s findings.