CFA Institute blog post by Lauren Foster

Here is something I didn’t expect to read today: Among the world’s high net worth individuals (HNWIs), “confidence in the wealth management industry has improved, with 61% having a high degree of trust in both wealth managers and their firms in early 2013, up four and three percentage points, respectively, from last year.

Increased trust and a cautiously upbeat economic outlook contributed to 75% of HNWIs feeling confident about generating future wealth.”

That was just one of the findings in the “World Wealth Report 2013” from Capgemini and RBC Wealth Management — but it’s the one that stood out for me because, as regular readers of this blog will know, restoring trust in the financial services industry is a major priority for CFA Institute.

But lest you get your hopes up too high, the report also noted that “HNWIs expressed a low level of confidence in markets and regulators, with fewer than half having a high level of trust in each (45 percent and 40 percent, respectively).”

Here are some of the other highlights of the report, which offers insights into the world’s HNWIs — those with US$1 million or more in investable assets:

·         The ranks of the world’s HNW population swelled in 2012, as one million individuals joined the club. The HNW population stood at 12 million, up 9.2% from the prior year.

 ·         Global HNWI wealth increased by 10% in 2012 — led by the global recovery in the equity and real estate markets — to a record high of $46.2 trillion, after falling 1.7% in 2011.

·         North America reclaimed its crown as home to the most HNWIs, after being overtaken briefly by Asia-Pacific the year prior. North America’s population of 3.73 million HNWIs inched out Asia-Pacific’s 3.68 million, while its HNWI wealth reached $12.7 trillion, compared with $12.0 trillion in the Asia-Pacific region.

 ·         Latin America, which had the highest growth rate in 2011, decelerated in 2012, with growth of only 4.4%. This was largely due to a slowdown in GDP growth and contraction in the Brazilian and Argentine equity markets. Mexico was a bright spot, with 6.6% growth in its HNWI population.

 ·         HNWIs were cautious in 2012, opting to focus on wealth preservation. Asset allocation trends followed “the preservation trend”, with nearly 30% of HNWI wealth held in cash and deposits. But there were clear regional differences: equities constituted the largest portion of North American HNWI portfolios (37%), while HNWIs in Latin America and Asia-Pacific (excluding Japan) preferred real estate (30% and 25% of portfolios, respectively).

 ·         On the regulatory front, the report noted that “the volume and pace of regulatory change is the single largest challenge facing wealth management firms, creating signficant and increasing costs related to both compliance and non-compliance, and constraints in delivering an integrated client experience.”

 You can download the full report here.

Source: blogs.cfainstitute.org 

Posted by Steven Maimes, The Trust Advisor

Permalink:   http://thetrustadvisor.com/news/2013-world-wealth

Reuters article by Sarah N. Lynch

SEC will use no admit, no deny settlements in most cases

U.S. securities regulators will try to extract admissions of wrongdoing from defendants in some settlements, potentially resulting in more cases going to trial, Securities and Exchange Commission Chair Mary Jo White said Tuesday.

The announcement marks a departure from the typical practice at the SEC and many other civil federal regulatory agencies of allowing defendants to settle cases without admitting or denying the charges.

That practice has come under scrutiny following the financial crisis, leading some federal judges to challenge or strike down proposed settlements.

“We are going to in certain cases be seeking admissions going forward,” White said at the annual “CFO Network” event hosted in Washington by the Wall Street Journal.

“Public accountability in particular kinds of cases can be quite important and if we don’t get them, then we litigate them.”

This marks White’s first big enforcement policy change since she took over the helm of the SEC in April.

The commission is also considering significant structural changes to its enforcement division to bolster its ability to try and win cases, people familiar with the division’s thinking said, after a mixed record in some recent financial crisis-related trials.

The enforcement division’s two co-directors, George Canellos and Andrew Ceresney, are considering organizational changes to strengthen coordination between investigators and trial lawyers so they fare better if they go to trial, and to better deploy the division’s accountants as part of a renewed effort to combat fraud, according to several people familiar with the matter.

Observers have been eager to see how White shapes the agency’s enforcement division, especially given her background as a former U.S. Attorney in Manhattan who prosecuted mobsters and terrorists.

In her confirmation hearing, she pledged to lawmakers that she would be a tough enforcer of the federal securities laws.

The changes to the settlement policy, announced internally to staff in an email on Monday, come at a critical time for the SEC.

The agency is awaiting a decision from a New York appeals court after U.S. District Judge Jed Rakoff in Manhattan declined to approve its proposed $285 million settlement with Citigroup Inc over whether the bank misled investors during the financial crisis.

‘NO ADMIT, NO DENY’ SETTLEMENTS WILL REMAIN

White told reporters on the sidelines of Tuesday’s event that people should not interpret the change as a criticism of the settlement policy and in fact a “majority” of cases will still likely be settled with defendants neither admitting nor denying any wrongdoing.

“This is not a criticism of the past practice and having ‘no admit, no deny’ settlement protocols in your arsenal as a civil enforcement agency (is) critically important to maintain,” she said.

She added that cases will need to meet certain criteria in order for the SEC to seek admissions. Those include cases where there was “widespread harm to investors” or “egregious intentional misconduct,” she said.

She described the change as “incremental” to the January 2012 announcement by former SEC Enforcement Director Robert Khuzami that the SEC would no longer allow defendants to neither admit nor deny the charges if they had already made admissions in parallel criminal cases.

Generally, SEC officials have staunchly defended the “neither admit, nor deny” policy.

White’s predecessor, Mary Schapiro, defended the earlier policy, saying that requiring admissions would discourage settlements, bottle up the courts with lawsuits, and cause delays in returning money to harmed investors.

Earlier this year, freshman Senate Democrat Elizabeth Warren of Massachusetts raised questions about that philosophy, and has been pressing the SEC for details on how it determines when to settle or take a defendant to trial.

Rakoff, who has been arguably the most vocal about the SEC’s settlement policy, declined to comment on the changes White announced.

The SEC enforcement division’s Canellos on Monday outlined some areas being explored to get investigators and trial lawyers working together more closely and effectively, according to several people familiar with remarks he made at a panel discussion in Washington.

Although the majority of the SEC’s cases are generally settled, the SEC has had mixed results when they have gone to trial in some financial crisis cases.

Last year, a jury rejected civil fraud charges against Reserve Primary Fund founder Bruce Bent, whose money market fund “broke the buck” during the financial crisis after its heavy exposure to Lehman Brothers prompted an investor sell-off. His son Bruce Bent II was also cleared of knowingly violating securities laws but was held liable on one count of negligence.

White gave no details about organizational changes when asked about the topic on Tuesday. But she said she wants to put a renewed focus on accounting fraud. “I think you’ll see more targeted resources in that area,” she said.

Officials are also considering creating an accounting task force, one person familiar with the matter said.

Source: Reuters

Posted by Steven Maimes, The Trust Advisor

Permalink:  http://thetrustadvisor.com/news/sec-settlements

The basics of unauthorized trading

Unauthorized trading goes beyond transactions that are made without a client’s permission or authorization. In a National Examination Risk Alert, the SEC stated that unauthorized trading includes:

• Rogue or unauthorized trades in client or proprietary accounts
• Intentional mismarking of positions
• Trading exceeding the RIA’s risk, position and loss limits
• Creating false records containing fictitious transactions

RIAs must be vigilant at all times for unauthorized trading schemes, and it is not just investment adviser representatives (“IARs”) or registered representatives who may be the culprit.  Traders, trading assistants, portfolio managers, or personnel involved in placing orders, might be involved. The SEC has warned that even administrative employees in a financial services firm’s mid- or back office, risk management employees, or an information technology employee, could be participating in an unauthorized trading scheme.

Steps to prevent and detect unauthorized trading

RIAs should implement policies and procedures intended to prevent unauthorized trading. By establishing effective compliance and supervisory controls, an RIA will be in a better position to detect and prevent unauthorized trading in client and proprietary accounts.

As a best practice, an RIA’s policies and procedures should identify red flags that could be indicative of unauthorized trading. For example, the firm might observe changes in an IAR’s lifestyle, such as an apparent increase in wealth that cannot be explained. In addition, it could be suspicious if a particular client of an IAR sustains abnormally high profits or losses. A high volume of trade cancellations or corrections might also be a sign of unauthorized trading activity.

Effective supervision is also an important tool that is used to prevent unauthorized trading. RIAs are obligated to supervise their associated persons. Aside from a person’s immediate supervisor, an RIA’s principals and chief compliance officer also have a duty to supervise an individual if they know or suspect the person is violating the firm’s policies and procedures.

The SEC believes that an RIA’s supervisory structure can help to detect and prevent unauthorized trading. Once there is any indication that an IAR or other employee has traded without authorization, the RIA should conduct an internal review. As part of this review, the RIA should look at the individual’s personal and family investments, including all trading accounts. The firm should also review the individual’s email, phone records, text messages, use of social media, and other communications to the extent they are available for supervisory review. To this end, advisory firms that have implemented a code of ethics should also have access to numerous securities transaction reports filed by the individual.

Be proactive not reactive

The best safeguard against unauthorized trading is robust policies and procedures that are strictly enforced by the RIA. Following are some areas identified by the SEC that may help firms in assessing risks and strengthening their policies and procedures for detecting and preventing unauthorized trading:

• Front Office Supervision including the trading desk and across the firm was identified as the firm’s most important control
• Mandatory Vacations, which help to ensure additional oversight by fill-in personnel
• Independent Trading Reviews
• Control Testing
• Tone at the Top that addresses an RIA’s general culture of ethics and compliance

Deviations from the firm’s policies and procedures should be dealt with immediately and forcefully. To that end, associated persons should be made aware of their responsibility to report policies and procedures violations.

Simply implementing policies and procedures does not insulate the firm from compliance problems arising from unauthorized trading. Individuals’ supervisory duties must be reasonably discharged, and persons with supervisory responsibility must have a reasonable belief that associated persons are complying with the RIA’s policies and procedures.

Suitability is another area that RIAs should consider in developing strong procedures aimed at detecting unauthorized trades. Many state securities laws specifically address suitability requirements, and the SEC has consistently maintained that suitability obligations are a natural outgrowth of an RIA’s fiduciary duty. Determining suitability is not a one-and-done process. Making sure that investments are suitable for a client is an ongoing process. Accordingly, RIAs should establish a process that is designed to collect, maintain, and update client suitability information.

RIAs should also take steps to address related areas dealing with unauthorized trading. The North American Securities Administrators Association’s model rule entitled, “Unethical Business Practices Of Investment Advisers, Investment Adviser Representatives, And Federal Covered Advisers,” specifies several potential problem areas. The model rule prohibits the exercising of discretionary power without obtaining written authority from the client, trading excessively, and placing an order to purchase or sell a security for a client’s account without proper authorization.

Ultimately, the most devastating impact of unauthorized trading may not involve regulatory sanctions. Engaging in this kind of activity can cause legal problems for an RIA and is likely to seriously damage the firm’s reputation. Thus, the onus is on the RIA to assess the risks posed by unauthorized trading within their firm and to strengthen their compliance and supervisory controls regarding these practices.

Rita G. Dew is the founder and president of National Compliance Services, Inc., a compliance consulting firm formed to assist state and federally registered investment advisers, hedge funds, mutual funds, and broker dealers nationwide. Ms. Dew is also the managing partner of The Law Offices of Rita G. Dew, P.A. The focus of her legal practice is on investment management and representing investment advisers and broker/dealers on issues dealing with corporate and securities law in the financial markets.

NYT article by Paul Sullivan

It might seem that a woman who died at 104 after spending 20 years in a hospital despite being healthy enough to live in one of her three stately homes, accumulated a vast collection of dolls and preferred to communicate in French even though her father had been a United States senator would have little to teach the rest of us.

John D. Dadakis, a partner at Holland & Knight who is representing the Clark estate, says his goal is no litigation with parties who have “ulterior motives.”

But two years after the death of that woman, Huguette Clark, the last surviving daughter of William A. Clark, who made a fortune in copper mining, her $300 million estate is still being disputed. And the battle has plenty of lessons for people with far less money.

At issue in Mrs. Clark’s case are two wills signed six years before her death in 2011. The first would have left most of her fortune to 21 distant relatives she did not know, may never have met and did not list by name. The second, signed a month later, increased the bequest for her caregiver, gave money to a goddaughter and established a foundation at her mansion in Santa Barbara, Calif., for her art and doll collection. The distant relatives got nothing.

The dueling wills have become part of a highly publicized court case involving Washington’s Corcoran Gallery of Art and one of Claude Monet’s Water Lilies paintings, valued at the time of Mrs. Clark’s death at $25 million. The case has also ensnared New York’s Beth Israel Medical Center, accused of pressing Mrs. Clark to make a big donation.

Documents full of intrigue have been filed in court — including a new cache just this week challenging the Corcoran Gallery’s claims — in preparation for a trial in September. The relatives could receive millions of dollars each if one or both wills is overturned or a settlement is reached. The caregiver and charities Mrs. Clark gave her money to could get nothing. Then there are the millions of dollars in legal fees to law firms and the tens of millions of dollars in estate taxes to the federal government, which will rise substantially if more money goes to the heirs than to charitable organizations.

“What we’re trying to do is make sure this case is being litigated with the right parties and not people who are trying to align themselves for ulterior motives,” said a lawyer, John D. Dadakis, in explaining the latest filings against the Corcoran. Mr. Dadakis is a partner at the law firm Holland & Knight, which is representing Mrs. Clark’s estate

It’s a big mess. But the dispute over Mrs. Clark’s two wills has implications for people with far less money. When is a person too old to decide her affairs? How can you insure that your money goes to the people and institutions you want to get it? Is there a way to prevent expensive lawsuits?

“People are living longer and they’re having periods of diminished capacity that are more and more common,” said Alan F. Rothschild Jr., a lawyer in Columbus, Ga., and a former chairman of the American Bar Association’s real property, trust and estate law section. “The litigation in this area is increasing because people are willing to sue more, even family members and the banks.”

Here is a look at some common issues raised in Mrs. Clark’s case.

DISPUTING HEIRS

Challenges to wills by distant relatives are so common that lawyers have a nickname for those people: “laughing heirs” — as in they will be laughing all the way to the bank if their challenge succeeds.

“People tend to come out of the woodwork and believe that they’re closer than they are and should have some claim,” said a litigator who specializes in contested wills who spoke anonymously because other lawyers at her firm worked with some of the heirs in the Clark case. “The most often-challenged wills are those for people who don’t have direct, obvious heirs.”

A more common situation arises when a parent treats children differently. The trickier cases are those in which family members have had a falling out.

Paige K. Ben-Yaacov, a partner in the private client section of Baker Botts, said she counseled clients not to divide their estates unevenly. “They’re just making matters worse and opening the estate up to litigation.”

In Mrs. Clark’s case, she did not name her relatives in her wills because she did not know most of them. For people who intentionally leave out children, Ms. Ben-Yaacov advises creating a trail of estate documents over many years laying out their wishes in detail.

Mrs. Clark’s second will was in effect for six years before she died — normally long enough to establish that this was her intent, had she not been 98 when she signed it.

LEAVING A COLLECTIBLE

The Corcoran Gallery is objecting to the will that gave it a $25 million Monet. If there were no will, the museum would receive a half-interest in a trust worth $3 million. That choice would seem to make little sense.

In an article in The Washington Post earlier this year, the Corcoran said it simply wanted to be sure that the second will, which gave it the painting, actually represented Mrs. Clark’s final wishes. Others have speculated that the Monet is not as valuable as once thought and that the museum would rather have cash than a painting it won’t display.

For people planning to leave something tangible like a painting to a museum, advisers suggest checking with the institution beforehand.

“You’d like to run that by them while the decedent is alive to make sure they’ll accept it,” said Sharon L. Klein, managing director of family office services and wealth strategies at Wilmington Trust. “You can’t force someone to take it.”

If the Corcoran doesn’t take the painting, the estate will have to pay about half of its value to the United States Treasury in estate taxes, since it will no longer be a charitable gift.

Mrs. Clark also set up, in the second will, a private foundation for the rest of her art and doll collection, to be housed in her mansion in Santa Barbara. Mr. Dadakis said the assets in the foundation accounted for about $125 million of the estate, including the mansion, worth $82 million. If that will is rejected, all will be subject to the estate tax.

PREVENTING DISPUTES

Contesting a will is costly, time-consuming and emotional. One way to ensure that doesn’t happen is to make the downside of losing a risk too severe to take.

 Long before death, when a will is filed and takes effect, people can put their assets into a revocable trust. They still have access to the money during their lifetime and can keep those assets out of the probate process. The trust could also act as a substitute for a will by naming other beneficiaries.

“The disappointed family member doesn’t have a legal right to challenge it,” Mr. Rothschild said. “They’d have to go to the court and say, ‘Even though it’s been in existence for many years, mother wasn’t competent to put it together.’ ”

When it comes to a will, one way to reduce the chances of a challenge is to put in a no-contest clause. In doing so a parent would leave a little to the otherwise disinherited children, but if they contest the will they get nothing.

“The trick is to strike the right balance between giving them enough so they’ll take it and not contest it and risk losing their inheritance,” Ms. Klein said. She said $5,000 might not do it, but $250,000 might.

For the big or contentious estates, like Mrs. Clark’s, the best option may be to appoint a professional trustee, usually from a trust company, who will be neutral. “If there is any kind of tension between family members it makes no sense to put a family member in there” as trustee, Ms. Ben-Yaacov said. “An independent trustee deals with this day in and day out. They’re good at defusing these situations.”

Source:  nytimes.com

Posted by Steven Maimes, The Trust Advisor

Permalink:   http://thetrustadvisor.com/news/avoid-estate-battle

We’ve been asking the principals of trust companies that report to the Office of the Comptroller of the Currency to describe what the national charter buys them for years now.

Turns out we’re not the only ones making inquiries.

“We have received a number of inquiries from advisors and their attorneys who want to put their clients in South Dakota,” says David Roberts, chairman of the holding company that runs National Advisors Trust.

Always receptive to what his RIA shareholders and customers need to keep their own clients happy, Roberts filled out the paperwork to start a subsidiary in Sioux Falls.

National Advisors Trust South Dakota is now open for business.

Asset protection, no state taxes

For Roberts, the primary motive that lured the RIA-owned firm to the high plains is simple: the people he works with demanded the ability to administer trusts from South Dakota for certain clients.

The follow-up question, of course, is why National Advisors affiliates are so hungry for access to this state in particular.

Some of the benefits are obvious. There’s no state capital gains, income, estate or generation-skipping tax, so those coming from elsewhere can reap a concrete economic advantage if they move their assets there.

And South Dakota has a well-earned reputation as one of the most trust-friendly jurisdictions in the country, supporting dynastic trusts, directed trusts and other must-have vehicles.

Asset protection trusts in particular are protected in the state’s statutes and not just case law, giving advisors a place to point clients whose professional standing or other factors make them magnets for litigation.

“We can actually predict with greater accuracy how legal actions might unfold in South Dakota,” Roberts explains. “For wealthy people, that’s piece of mind they can’t get anywhere else.”

Why not the other states?

While South Dakota has created an eminently attractive trust environment, Roberts notes that there are probably a half dozen other states actively competing for assets.

But as yet there doesn’t seem to be as much grassroots interest among RIAs in getting National Advisors Trust to collect a Nevada or Delaware or Alaska charter.

South Dakota’s informal marketing efforts may simply be getting the word out faster than its rivals.

National Advisors Trust already works with partners in Delaware when it needs access to that state’s asset protection and other provisions.

Adding South Dakota to the mix gives affiliates even more options, and while Roberts doesn’t say so, opening an office in the state is a lot cheaper than setting up shop in Wilmington.

Either way, since it’s unlikely that the clients themselves are clamoring for one jurisdiction over another, the advisors are the ones steering the accounts.

They wanted South Dakota and evidently got it.

Not giving up the national charter

While National Advisors Trust now has a presence in South Dakota, the home office will remain in Kansas and the day-to-day trust operations will primarily run out of Missouri as they do now.

The national charter still works as well as it ever did for a lot of the firm’s accounts. That will continue.

Likewise, National Advisors Trust isn’t about to veer away from directed trusts – in which the introducing advisor remains in control of the investment decisions – any time soon.

But trusts that would benefit from being created in Sioux Falls or even moved to the state will do so.

So far, there’s no way to tell how much of National Advisors Trust’s $8 billion in assets under administration will move to National Advisors Trust South Dakota.

And we can’t say yet how many of the company’s 135 shareholder RIAs will leap at the opportunity they have now to promote South Dakota trusts to their high-net-worth clients.

However, the new charter seems to be a good sign. Roberts tells me the pipeline of firms looking to come aboard is healthy and several discussions are well along.

The chance to offer HNW households best-of-class trust was always a tempting prospect. Offering them a wider choice of where to situate those trusts should make it even sweeter.