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.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
The Department of Labor has reached a settlement with an Iowa-based investment advisor over investment recommendations he, his firms and former employees made and the resulting fees and commissions charged to pension plans.
In addition, the SEC has charged brokerage firm executives in connection with a kickback scheme to bring in business from a Venezuelan bank, and FINRA has censured and fined firms over anti-money laundering and written supervisory procedure failures and censured and fined Banesto Securities for custody fee failures.
Iowa Advisor, Firms and Former Employees Repay 68 Pension Plans
As part of a settlement with the Department of Labor, Iowa-based investment advisor Donald Gene DeWaay Jr. has paid $341,487 to 68 Employee Retirement Income Security Act-covered pension plans. An investigation by DOL’s Employee Benefits Security Administration found violations of federal law in investment recommendations made and fees and commissions received by DeWaay, entities he owns and former employees.
DeWaay owns or owned three companies based in Johnston: DeWaay Capital Management Inc., an investment advisory firm; DeWaay Benefit Administrators LLC, an employee benefit plan administrator; and DeWaay Financial Network LLC, a now defunct full-service brokerage company.
The violations occurred between May 2007 and November 2011. EBSA investigators found that DeWaay’s companies and advisors not only charged higher fees than those agreed to by their clients, but in addition, recommendations made to clients also resulted in DeWaay, his companies and former employees receiving third-party commissions. DeWaay has also agreed to pay up to an additional $212,727 over the next five years to other ERISA plans he managed.
Under the terms of the settlement, DeWaay and four investment advisors he employed, Joshua Cross, Paul Espey, Andrew Kleis and Brenton Collins, have agreed moving forward to disclose to ERISA plan clients whether they will act as fiduciaries to those plans.
The investment advisors and companies will also provide their ERISA plan clients a description of all investment or transaction compensation and fees received, regardless of its source or form. They have also agreed that either they will not collect commissions from third parties or, if they do, will refund 100% to their ERISA plans clients. DeWaay also agreed to be removed as trustee of the DeWaay and Associates Inc. 401(k) Profit Sharing Plan, and to no longer serve or act as a fiduciary or service provider to the plan.
SEC Charges Brokerage Firm Execs in Venezuelan Bank Kickback Case
The SEC has taken additional action in the ongoing kickback scheme that was designed to win the bond business of a state-owned Venezuelan bank.
According to the agency, two executives at New York City-based brokerage firm Direct Access Partners (DAP) were integral participants in the wide-ranging fraud. Benito Chinea, a cofounder and CEO of the firm, and Joseph DeMeneses, who was DAP’s managing partner of global strategy, put together sham actions to cover up multimillion-dollar kickback payments to a high-ranking Venezuelan finance official of the bank.
In just one part of the scheme, DeMeneses made kickback payments from funds he controlled to a shell entity controlled by the Venezuelan official, and Chinea arranged for the firm to reimburse DeMeneses. The SEC filed an amended complaint to include these allegations in the action already pending against five other DAP-connected individuals who have already been charged for their part in the plot.
The SEC is seeking disgorgement of ill-gotten gains plus interest and financial penalties against Chinea, who lives in Manalapan, N.J., and DeMeneses, who lives in Fairfield, Conn., as well as the five previously charged defendants with ties to DAP, which has filed for bankruptcy. The investigation is continuing.
AML, Unregistered Securities Failures Bring FINRA Fines
New York-based Vertical Trading Group, LLC, and registered principals Glenn Matthew Chaleff and Mark McCabe Duncan were the targets of a FINRA action.
The firm was censured and fined $400,000, and required to review and revise policies, procedures and internal controls on anti-money laundering (AML) regulations and Section 5 of the Securities Act of 1933. Chaleff was fined $15,000 and suspended from association with any FINRA member in any principal capacity for two months, while Duncan was fined $50,000 and suspended from association with any FINRA member in any capacity for two months. They neither admitted nor denied FINRA’s findings, but consented to the measures.
According to FINRA, the firm and Duncan engaged in the distribution of $10 million in unregistered securities, failed to conduct an adequate independent inquiry to determine whether those shares were freely tradable, and failed to conduct a reasonable inquiry to determine whether the stocks could be properly sold under the claimed exemption.
The firm and Chaleff, meanwhile, failed to implement written supervisory procedures (WSPs) and thus allowed a customer to sell large volumes of those thinly traded securities despite numerous red flags indicating that the customer was engaged in efforts to evade compliance with Section 5 of the Securities Act of 1933. The shares were not registered and not exempt from registration, but the customer claimed that it had converted debt that the issuer owed to third parties into equity of the issuer.
WSPs in place at the firm were inadequate to ensure the firm’s business model would be compliant; instead, the firm relied partly on exception reports to detect suspicious activity, while Chaleff would randomly review customer trades to look for spikes in volume. He failed, however, to identify red flags, and his method meant that he failed to recognize patterns indicating suspicious activities.
The firm also dealt with foreign financial institutions and failed there as well to act on red flags in the institutions’ trading patterns or on the disciplinary histories of traders authorized to act for those institutions. In addition, there were other due diligence failures.
FINRA Censures, Fines Banesto $650,000 on Custody Fee Failures
New York-based Banesto Securities, Inc., now known as Santander International Securities Inc., was censured and fined $650,000 after FINRA found that for seven years, the firm consistently failed to disclose to clients the purpose and nature of a custody fee.
According to FINRA, clients would be notified via a commission schedule provided when they opened an account that Banesto charged a custody fee to all clients. Neither the purpose nor the nature of the fee was disclosed. Instead clients were given a mathematical formula used to determine the amount of the fee, which was charged at the beginning of each quarter based on assets as of the last day of the previous quarter.
Monthly account statements characterized the fee either as an administrative fee or a fee-based brokerage charge. Neither of these terms accurately described the fee.
In addition, when the fee was increased, clients were provided with only 11 days of written notice instead of the 30 days required, and some clients were not provided with any notification at all. Those clients have since been reimbursed. FINRA also found that the firm’s supervisory procedures failed to determine the reasonableness of fees.
Check out SEC Charges San Diego Firm, Execs in Kickback Scheme on ThinkAdvisor.