More On Legal & Compliancefrom The Advisor's Professional Library
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
- 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 by the SEC are charges against six individuals for insider trading. FINRA fined and censured Barclays Capital on options reporting failures and Edward D. Jones on inappropriate recommendations of alternative ETFs.
SEC Charges 6 With Insider Trading Prior to eBay Acquisition
The SEC has charged six individuals with insider trading in connection with the eBay's acquisition of an e-commerce company.
Christopher Saridakis, a former executive for a company that was acquired by eBay, was charged, along with five traders, with insider trading after Saridakis passed along confidential information that was spread and acted upon by friends and relatives.
Saridakis, who was CEO of the marketing solutions division of GSI Commerce, not only provided two family members and two friends with nonpublic information about the pending acquisition but also encouraged them to trade on it, resulting in ill-gotten gains of more than $300,000. The information spread in a complex web and resulted in a total of $738,635 in downstream profits.
Saridakis became aware of negotiations between GSI and eBay in early 2011, and his involvement increased when he participated in a meeting between eBay and GSI executives on March 11. In the weeks leading up to the acquisition, Saridakis tipped two family members, as well as his longtime friend and former colleague Jules Gardner. Gardner in turn shared the information with other friends who traded on it.
But Saridakis didn’t stop there. He also told his friend Suken Shah about the impending deal, and Shah told his brother, who then spread the information even further.
Saridakis agreed to settle the SEC’s charges and pay $664,822, which includes a penalty twice the amount of his tippees’ profits; he also agreed to an officer-and-director bar. In addition, he is the target of criminal charges brought in a parallel action by the U.S. Attorney’s Office for the Eastern District of Pennsylvania.
The five traders, and one individual who entered into a nonprosecution agreement with the SEC, will pay a combined total of more than $490,000 in their settlements, which range from disgorgement-only or reduced penalties for cooperators to penalties of two or three times the trading profits for other traders.
Gardner has agreed to fully disgorge his ill-gotten gains of $259,054 as part of a cooperation agreement in which the SEC is not seeking a penalty. Gardner also agreed to continue cooperating in the ongoing investigation.
Suken Shah agreed to settle the SEC’s charges in an administrative proceeding by paying disgorgement of $10,446, which includes $609 in trading profits made by the other individual he tipped. He also agreed to pay prejudgment interest of $1,007 and a penalty of $64,965 for a total of $76,418.
Shimul Shah agreed to disgorge his trading profit of $11,209 and pay prejudgment interest of $1,022 and a penalty of $22,418 for a total of $34,650.
The individual who got the nonprosecution agreement was tipped by Shimul Shah at a group dinner. This individual has agreed to disgorge a trading profit of $31,777 and pay $2,725 in prejudgment interest for a total of $34,502. The SEC said this individual provided early, extraordinary, and unconditional cooperation.
Gabay cooperated early in the investigation, and agreed to settle the SEC’s charges by disgorging his trading profit of $23,615 and paying prejudgment interest of $1,207 and a penalty of $22,177 for a total of $46,999. Yehuda agreed to settle the SEC’s charges by disgorging his trading profit of $20,740 and paying prejudgment interest of $1,666 and a penalty of $20,740 for a total of $43,146.
Edward Jones Censured, Fined on ETF Recommendation Failures
FINRA censured Edward Jones & Co. and fined the firm $200,000, as well as requiring customer restitution of $51,581.25, after it found that the firm had allowed registered representatives to recommend nontraditional ETFs without reasonable due diligence on those ETFs to determine whether they were suitable for those customers.
The reps were responsible for approximately 15,000 nontraditional ETF transactions, at a combined value of approximately $164 million, in retail customers’ accounts, even though some customers had not indicated that they were willing to take aggressive risks by investing in such products. In addition, the firm’s supervisory system was inadequate to achieve compliance on this and on making sure that brokers executed due diligence on nontraditional ETFs, nor did it make sure that brokers had adequate information and instruction on the nontraditional ETFs before making their recommendations.
The firm neither admitted nor denied FINRA’s findings, but consented to the measures.
FINRA Fines, Censures Barclays Capital on Options Reporting Failures
Barclays Capital Inc. was censured and fined $750,000 after FINRA found that it had incorrectly reported large conventional nonindex option positions to the Large Options Position Reporting (LOPR) system as index options.
Without admitting or denying the charges, Barclays agreed to the sanctions and to FINRA’s findings that it had exceeded the applicable position limit in options for a combined total of 86 business days, and also failed to report its Options Contract Equivalent of the Net Delta (OCEND) position to The Options Clearing Corp. (OCC) in one symbol for 23 business days.
In addition, there were other LOPR reporting failures, as well as failures to follow up and review its actions in a way that would reasonably achieve compliance.
Check out SEC Fines NYSE, 2 Affiliates $4.5 Million for Breaking Their Own Rules on ThinkAdvisor.