Posts Tagged sec

Legg Mason Looks To Create New ETFs

Yahoo Finance article by Max Chen

Legg_mason_towerLegg Mason Inc. has moved closer toward the exchange traded fund arena, filing with the Securities and Exchange Commission to build index-based stock and bond ETFs.

According to a recent SEC filing, Legg Mason is applying for an exemptive relief to create ETFs that reflect the performance of an underlying index.

“The Initial Fund will be an Equity Fund whose performance will correspond generally to the performance of a securities index developed by a third party (the ‘Initial Underlying Index’),” according to the filing. “Each Fund will seek to provide investment returns that correspond, before fees and expenses, generally to the performance of a specified equity and/or a specified fixed income securities index (each an ‘Underlying Index’ and collectively, ‘Underlying Indexes’).”

The money manager stated that the recent filing is “the next step in building the organizational structure to offer a suite of passively and actively managed ETFs,” reports Trevor Hunnicutt forInvestmentNews.

The company also mentioned that the index-based ETFs are going to be “better beta,” which suggests that offerings could be smart-beta ETFs.

The move into passive index-based ETFs comes as no surprise after the firm snagged two seasoned ETF experts from Vanguard earlier this year. Legg hired Rick Genoni and Brandon Clark to lead its ETF strategy back in February.

Genoni has worked on ETF product management for Malvern, led ETF product management in Vanguard from 2006 to 2011, and took over global ETF product management in 2013.

Clark covered the trading side of the ETF business and took over Vanguard’s capital markets desk in 2012, helping large investors on ETF trade executions.

Legg Mason has already received regulatory approval for actively managed ETFs back in 2012 but has refrained from launching any active ETF strategies.

More large mutual fund providers are looking at the ETF space. For instance, the SEC has already approved, or said it will approve, 19 applications for index-based or active ETFs this year, including American Funds, Goldman Sachs Group and Janus Capital Group.


Posted by:  The Trust Advisor


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SEC Charges Utah-Based Retirement Fund With Fraud, Freezes Assets

Reuters news by Avik Das and Suzanne Barlyn

pension-fundU.S. securities regulators have charged a Utah-based retirement fund and its CEO with defrauding investors of millions of dollars and froze the fund’s assets.

The U.S. Securities and Exchange Commission said American Pension Services Inc and its founder and CEO Curtis DeYoung lost more than $22 million of investor funds on high-risk investments.

“This misconduct jeopardized retirement security for thousands of APS customers,” said Karen Martinez, director of the SEC’s Salt Lake Regional Office.

According to the SEC, DeYoung’s schemes targeted customers with retirement accounts holding assets typically not available through traditional 401(k) retirement plans or through other individual retirement accounts (IRA) custodians.

The SEC also alleged that investments in bankrupt ventures, including an office building in Wichita, Kankas, caused APS customers to lose more money.

APS concealed those losses and issued account statements that inflated the value of customer holdings, allowing APS to levy fees based on the full value of the holdings even when they were worthless.

Self-directed IRAs are an area of focus for the SEC, Andrew Ceresney, the agency’s enforcement head, said on Wednesday at the Reuters Financial Regulation Summit in Washington.

The SEC is especially concerned, “given the lack of regulation in that area,” Ceresney said.

Last year, the agency filed civil charges against an Indiana man who allegedly helped investors set up self-directed IRA accounts and gained control over their retirement assets, which he used to fund luxurious personal expenses and several start-up companies, the SEC said.

More enforcement cases are in the works, Ceresney said.


Posted by:  Steven Maimes, The Trust Advisor




SEC Issues New Social Media Guidance For Financial Advisers

Reuters News by Suzanne Barlyn

social_mediaNew guidance about social media from the U.S. Securities and Exchange Commission gives certain financial advisers some leeway to promote client reviews of their services that appear on third-party social media websites.

The guidance is likely to ease advisers’ worries that reviews by their clients on websites such as Yelp Inc or Angie’s List could violate an SEC rule that forbids “testimonials,” compliance professionals said. The guidance clarifies that advisers registered with the SEC can point prospective clients to those reviews in advertisements, subject to certain conditions.

“It’s a pretty big change. It should make some people happy,” said Cathy Vasilev, vice president of Red Oak Compliance Solutions LLC in Fredericksburg, Texas.

The March 28 guidance is the latest step in a years-long effort by regulators to weigh in on how financial advisers and their firms can engage with clients online without running afoul of industry rules on advertising and communicating with the public.

The SEC clarified that client reviews do not violate its ban on client testimonials as long as they appear on independent social media or review sites. Those sites, however, must let viewers see all public comments, whether good or bad, related to the adviser, it said. Advisers must have no sway or control over the comments.

For example, the reviews cannot appear in Facebook pages that advisers create to promote their own businesses. Directing employees to write reviews or promising discounts to clients in exchange for positive reviews could spell trouble, the SEC wrote.

Restrictions apply to using social media reviews in print, radio and television advertisements, the SEC said. For example, advisers cannot publish verbatim reviews from the third-party sites. They can, however, direct advertising audiences to “see” the reviews on those sites.

The SEC’s guidance is available here:


Posted by:  Steven Maimes, The Trust Advisor



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U.S. House Passes Bill to Delay Fiduciary Rules at SEC, Labor Dept

Reuters News by Sarah N. Lynch

The U.S. House of Representatives passed a controversial bill on Tuesday that would delay two government regulators from adopting rules requiring stock brokers and retirement account financial advisers to put their customers’ interests ahead of their own.

The bill, which was approved in a 254-166 vote, has virtually no chance of becoming law, after the White House late Monday threatened to veto the measure.

Its passage, however, marks yet another symbolic effort by Republicans to express their discontent over the sweeping new regulations that stem from the 2010 Dodd-Frank Wall Street reform law.

The bill is one of two measures before the House this week that would amend the Dodd-Frank law.

On Wednesday, the House is also expected to pass a bill with some bipartisan support that would loosen a requirement for banks to spin off their risky derivative trading desks into separate legal entities.

Although the White House has cautioned against passage of the derivatives bill, it stopped short of a veto threat.


The fiduciary bill, sponsored by freshman Republican Representative Ann Wagner of Missouri, targets rulemaking efforts at both the U.S. Securities and Exchange Commission and the Department of Labor that would impose a fiduciary duty on certain kinds of financial advisers.

The bill calls for the SEC to undertake additional study before writing any new rules to harmonize standards between investment advisers and stock brokers to determine whether regulatory changes would help or hurt retail investors.

It would also force the Labor Department to delay adopting any rules targeting retirement advisers until the SEC completed its own regulations first.

In voting to pass it, 30 Democrats joined ranks with Republicans in support of the measure.

“The Securities and Exchange Commission and the Department of Labor…are headed towards proposing two massive and inconsistent rulemakings that are going to hurt the ability of retail investors to get financial advice,” said House Financial Services Committee Chairman Jeb Hensarling.

Maxine Waters, the ranking Democrat on the committee, voted against the measure, saying it “just goes too far…

“The bill holds the Labor Department hostage while throwing up road blocks for the SEC,” she said.

The Dodd-Frank law required the SEC to study whether it should harmonize two different standards of care for stock brokers and investment advisers.

It also authorized, but did not require, the SEC the develop new standards.

Investment advisers are already held to a fiduciary duty, meaning they must put their investors’ best interests first.

Brokerages, however, are only required to offer advice about investments that are “suitable” – a less stringent standard that some say leads to conflicts of interest because brokerages may be more likely to recommend products that generate higher compensation.

The SEC released a study on the issue in 2011 that called for imposing a harmonized fiduciary standard for advisers and brokerages.

Meanwhile, the Department of Labor has separately been pursuing its own proposal that would impose fiduciary responsibilities on advisers to workplace retirement plans and individual accounts.

To date, however, the SEC has not yet issued a proposal and the Labor Department in 2010 withdrew an earlier version amid heavy criticism from the brokerage industry.

The SEC solicited more data from the industry in a March 2013 request, in an effort to help inform whether it will proceed with writing the new rules.

Earlier this month, SEC Chair Mary Jo White told reporters the fiduciary rule was still a “major focus” and the SEC was working to resolve “where we’re going on it.”

The Labor Department has also been working toward issuing a revised proposal, but has yet to do so amid a strong push by Wall Street to delay the measure.

The Securities Industry and Financial Markets Association, the leading trade group for the brokerage industry, has opposed to the DOL’s efforts.

“The DOL should not act in this area until the SEC. Dodd-Frank made it very clear that it was the SEC’s responsibility,” SIFMA Chief Executive Judd Gregg told Reuters on the sidelines of a recent conference.

Proponents of strong fiduciary duty rules, however, have been out in force urging lawmakers to oppose the bill.

The bill is a “back door attempt to undermine investor protection provisions in Dodd-Frank,” the Financial Planning Coalition argued in a letter to Congress issued on Monday.


Posted by Steven Maimes, The Trust Advisor



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Fiduciary Standards For Advisors

Bank Investment Consultant article by Paul Werlin

The distinction between the suitability standard under FINRA and the fiduciary responsibility under the SEC may sound like much ado about nothing. But that’s hardly the case.

Dodd-Frank authorized the SEC to require brokers to adopt the same fiduciary standard of care that applies to investment advisors. And while the SEC has not done so yet, it feels like a unified fiduciary standard of some type is just around the corner.

Indeed, SEC Commissioner Elisse Walter referred to the idea of a uniform fiduciary standard as a “gold standard” last month at a FINRA conference.

So what’s the effect on bank advisors? First, there is a broad consensus that much of the burden of this change will fall on the FAs. “There’s no way around it,” says Steve Dowden, CEO of Invest Financial, a broker dealer in the bank channel. “It will result in “more time training, more time documenting meetings and conversations, deeper and perhaps more frequent compliance audits and reviews,” he said.

That would be unwelcome news as FAs are getting close to their “breaking point with the compliance burden,” noted Judy Payuk, chief compliance officer of St. Louis-based First Banks’ wealth management division. Still, she says that the day of a unified standard is coming. And even though it will be a long, drawn-out process, “when it comes, it will be painful to the firms and the FAs who will both need to change the way they do business.”

Indeed, a specific pain point to bank programs will involve their licensed bankers as those employees may have a harder time passing the new threshold. “It’s absolutely a likely outcome that a unified fiduciary standard will mean the end of FINRA licensed bankers selling securities,” says Kevin Carreno, a lawyer and president of Experts Council, a Florida-based consulting firm. Carreno is also a member of FINRA’s Board of Governors. “How do you look the customer in the eye and say you’re acting as a fiduciary when you have limited product solutions to recommend and only do the job part-time? I don’t think you can,” he said.

Payuk agreed. “If we have to work under a unified fiduciary standard, I think it’s likely that there will be no licensed bankers on the platform, and sales will be limited to life insurance and fixed annuities. That will mean the end of FINRA licensed branch managers and CSRs selling mutual funds, VA’s and other securities from the platform.”

This could mean a big change for many bank programs with mutual funds, VAs, UIT’s, fixed-indexed annuities and even market-linked CDs being sold by licensed bankers. Some bank programs derive more then 40% of their revenue from platform sales, so any changes to how licensed bankers do business can be significant.

If there is a unified fiduciary standard, many banks will likely just eliminate FINRA licensed bankers from the platform. It may not be worth the risk and expense.

Bruce Stava, director of advisory sales at First Bank’s wealth management group, notes that a unified standard also may make it harder for online firms. “A fiduciary relationship means an FA must really know their customer. It may be very difficult for the online firms to accomplish this to the degree regulators seem to want. How can these firms really meet a fiduciary standard in a virtual world? I don’t know.”


Coming to an agreement on a fiduciary standard could take time, however, as industry groups weigh in and the SEC grapples with other decisions tied to Dodd-Frank.

Moreover, there is also disagreement that it’s even a good idea.

Carreno says the idea of a unified fiduciary standard sounds good and is politically attractive, but in many ways it is ultimately unworkable.

“It’s not in the interest of the big-boys, the bulge-bracket b/d’s, to operate under a fiduciary standard. So much of their business is on a principal-basis, buying and selling from their own account, it would be virtually impossible for any b/d to act on a principal basis, even with disclosure.”

Dowden disagrees. “From a consumer standpoint, a unified fiduciary standard is long overdue,” he said. Nearly all of Invest Financial’s 1,200-plus FAs are RIAs as well. “It’s now three years after Dodd-Frank was passed and about one-third has been implemented, one-third is in process and one-third, including a unified standard, is stuck.” But, he believes it’s coming and it’s ultimately positive for the industry. “While clients have not been ill-served by the suitability standard, I believe it will benefit everyone when we have a common set of rules and regulations.”

However, with gridlock in Washington and the tug-of-war between the SEC and FINRA, he doesn’t expect anything until 2014 or 2015. And even then, he expects a “blended” version where parts of the fiduciary and suitability standard will both exist. He summed it up by saying, “it will level the playing field, and that’s a good thing for everyone.”

One area that brings wide agreement is the inevitable increase in costs to broker-dealers. Dowden notes that there will be “more continuing education, more training, more documentation on customer interactions, and more technology to track, store, maintain and analyze it all.”

And banks, along with all other broker-dealers will be looking at higher costs for everything from supervision (more in-branch audits), to more technology (to maintain more documentation and customer-FA records and communications), to training. It’s unknown if bank programs will pass these costs on to their clients in higher fees, reduced commissions to FAs or find some other way to handle the increased burdens.

First Bank’s Stava says that this shift will drive broker-dealers to products with ongoing fees to “help offset all these additional costs.”

So what’s the next step on this standards evolution? The SEC has asked for additional comments to be submitted by July 5th, but whatever it comes up with will likely receive vigorous opposition from some players.

For bank program managers, there seems to be a lot of “watchful waiting.” Working with the suitability standard for decades, most bank programs are comfortable talking to their customers about risk and they want their customers to understand the downside as well as the upside of any investment products they sell.

But in the future, there may be a new standard to bear.


Posted by Steven Maimes, The Trust Advisor


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Private Firms, Funds Can Now Target Wealthy Investors With Ads, Cold Calls

SF Gate blog post by Kathleen Pender

Accredited investors: Hold onto your wallet.

telemarketThe Securities and Exchange Commission this month issued a final rule lifting the 80-year-old ban that prohibited private companies from seeking accredited investors through advertising and other forms of general solicitation. Accredited investors: Better start watching your wallet.

The federal government has tried to protect investors by requiring companies that sell securities to register them with the SEC and submit to a whole host of disclosure and other requirements. One way they can get around this requirement is to sell securities only to wealthy people known as accredited investors and institutions such as pension funds.

Until now, they could not advertise these private offerings. They generally had to use networking and word of mouth.

The new rule will let private companies large and small – as well as venture capital, private equity and hedge funds – reach out to accredited investors through traditional and social media or, for example, cold calling every doctor and dentist in Marin County. They can still raise an unlimited amount of money from a limited number of investors before they have to register their securities.

The new rule, which takes effect 60 days after it is published in the Federal Register, requires companies that advertise unregistered securities to take additional steps to make sure their investors are accredited. To meet that definition, an investor must have earned at least $200,000 in each of the past two years ($300,000 if married) or have at least $1 million in net worth (single or married) excluding their primary residence.

The SEC estimates that at least 8.7 million – or 7.4 percent – of U.S households meet the net worth standard.

Private fund managers that earn a fee based on their performance, and most do, can only accept investors with at least $2 million in net worth or $1 million invested with that manager.

Tent at the U.S. Open

The big private companies and fund managers that have no trouble raising money are not going to start hawking deals on TV or Facebook, although you might see “branding-type advertising, like a tent at the U.S. Open or a box at the Knicks game,” says Jay Gould, a securities lawyer with Pillsbury Winthrop Shaw Pittman.

The ones most likely to advertise are second-tier funds and companies with shorter track records and sketchier ideas. Investors should ask themselves if they want to get involved with companies that need to raise money this way.

They also should realize that most startups fail. A sophisticated angel investor might buy into 20 or more with the hope that one big winner will more than make up for 19 losers.

If you know what you are doing, you should not invest in fewer than 20 companies, says Thomas Korte, a venture capitalist and founder of AngelPad, a San Francisco startup accelerator. If you don’t know what you are doing, consider investing in 50 to 100.

“We will probably have a learning curve, where people get excited about investing in things they haven’t been able to see before,” Korte predicts.

He grew up in West Germany and when the Berlin Wall came down, “you would see East Germans overspending on bananas and all kinds of things (including old copies of Playboy) they didn’t have access to before. It took time for them to understand what the value of a banana was and not pay the equivalent of $10 for the first banana they saw.”

Likewise, many investors who respond to private offering ads are likely to get burned before they wise up.

Congressional mandate

The SEC was ordered by Congress, in the Jumpstart Our Business Startups Act of 2012, to lift the general solicitation ban. But it was up to the SEC to write the rules implementing that portion of the law, and determine whether new investor protections were necessary.

Most of the protections investor advocates were seeking did not make it into the final rule.

For example, if private fund managers advertise their performance, it cannot be fraudulent, but they do not have to follow any standards like the strict ones that apply to mutual fund performance advertising. “We wanted the performance claims based on some recognized standard,” says Barbara Roper, director of investor protection for the Consumer Federation of America.

Advocates also had pushed the SEC to revise the definition of accredited investor, perhaps to include some measure of financial sophistication.

The SEC did not change the definition. It did include some protections in a proposed rule put out for comment on Wednesday, but that proposal is not mandated by law and there is no telling whether it will be adopted.

The adopted rule does require companies to notify the SEC, by checking a box on a form, when they plan to advertise unregistered securities. That way the SEC can check to see if companies that advertise are taking the additional steps to make sure their investors are accredited.

They can verify this status in various ways, such as getting copies of tax returns, W-2 or 1099 forms, bank and brokerage statements, credit reports or a written confirmation from the investors’ attorney, investment adviser or CPA.

Today, “the investor makes the representation (that he is accredited) and unless there’s a reason not to believe him, that is pretty much it,” Gould says.

Bad actors

The SEC adopted a second rule on Wednesday that will prevent securities felons and other so-called bad actors from raising money in private placements. However, the ban only applies to people who get caught after this rule takes effect (also 60 days after it is published).

“The bad-actor rule was mandated under Dodd-Frank to keep certain types of felons out of this market, but you can have a list of felonies as long as your arm and as long as you don’t do anything after September, you are good to go,” Roper says.

How will firms actually advertise private offerings?

If you are in Silicon Valley and have a decent idea, “you can always find angels” to give you your first $1 million or $2 million, says Jared Kopel, a San Jose securities lawyer. “The problem is, once you are going a few years and want to scale up, getting that next $3 million to $5 million … from VC firms is difficult and raising it in bits and pieces from new angels or friends and family” is time consuming.

“That would be exactly the kind of situation where someone says, ‘Hey, I can put an ad on the Internet, a newspaper, radio, or put out a podcast on a website.’ ”

Mukesh Lula, president and co-founder of TeamF1, a private network and security software company based in Fremont, would consider using the new rule to raise money in a private placement, but “we would not explicitly advertise,” he says. “That could seem desperate.”

How it could help: It would be easier to talk about his company at an investment conference without running afoul of the general solicitation ban. “That was not allowed earlier, or it was a gray area.”


Posted by Steven Maimes, The Trust Advisor



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SEC to Seek Admissions in Some Settlements

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.


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


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SEC Charges California Wealth Manager With Insider Trading

From The Motly Fool by Rich Smith

The Securities and Exchange Commission charged a South Pasadena, Calif.-based wealth-management company and its former fund manager with conducting a three-year-long insider-trading spree in shares of Dell , NVIDIA , and Wind River Systems.

According to the SEC, from 2008 to 2010, Whittier Trust Company fund manager Victor Dosti “generated profits and avoided losses for funds he managed at Whittier Trust by trading on confidential information that he obtained from Danny Kuo, a Whittier Trust fund manager who Dosti supervised.”

The SEC alleges that Dosti used inside information from Kuo to trade into and out of Dell and NVIDIA stock ahead of quarterly earnings announcements, and also traded Wind River stock ahead of news that Intel had agreed to buy it in 2009 — reaping $475,000 in gains and “avoided losses” from the first scheme, and $247,000 from the second.

“Time and again, Dosti received what he knew was inside information from Kuo and traded on it to generate illicit gains for the funds he managed,” said SEC New York Regional Office Senior Associate Director Sanjay Wadhwa.

As is usual in this kind of announcement, revelation of the SEC’s charge against the defendant, and conclusion of the matter, were made simultaneously. In this case, Whittier Trust has agreed to:

  • Disgorge profits of $724,052.
  • Pay interest of $75,296 on the ill-gotten gains.
  • Pay a penalty of $724,052, equal to the amount of the illicit profits.

Similarly, Dosti has agreed to:

  • Disgorge profits of $77,900.00.
  • Pay interest of $2,951.
  • Pay a penalty of $77,900, equal to the amount of the illicit profits.

In neither case did the defendants either admit or deny wrongdoing.


Posted by Steven Maimes, The Trust Advisor



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Let Investors Sue Their Advisers: SEC’s Aguilar

In searching for a better way of policing Wall Street, SEC commissioner Luis Aguilar is onto something: Let investors sue their advisers the way they could sue their doctors for malpractice.

SEC Commissioner Luis A. Aguilar

SEC Commissioner Luis A. Aguilar

Speaking before state securities regulators (NASAA) in Washington on April 16, Aguilar was not only critical of the industry’s sacrosanct rules that prevent investor lawsuits, but new SEC guidelines  that could be much tougher in preventing fraud:

“In light of the SEC’s actions to shut out investors’ voices, and in unduly delaying the adoption of investor-friendly rulemaking, it is now more important than ever that defrauded investors have the ability to seek redress against those who participate in defrauding them. Unfortunately, a series of Supreme Court cases has restricted aiding and abetting liability in private actions.”

“Seek redress” is lawyerese for the ability to sue someone, instead of the weak-kneed arbitration clauses in place now. Aguilar continues:

“I agree with NASAA’s request that Congress amend the Securities Exchange
Act of 1934 (“Exchange Act”) to allow for a private civil action against a person that provides substantial assistance in violation of the Exchange Act. In 2009, former Senator Arlen Specter introduced legislation that would have amended the Exchange Act so that any person who ‘knowingly or recklessly provides substantial assistance to another person would be subject to liability in a private action to the same extent as the person to whom such assistance is provided.‘ I join with NASAA in calling on Congress to reintroduce this legislation.”

But mandatory arbitration handcuffs investors into signing away their rights to sue. It isn’t fair and denies them due process. The arbitration clause  should be declared unconstitutional.

Out of 134 broker-dealer enforcement cases examined last year by the SEC, roughly 95 cases, or 71%, involved allegations of fraud under the Exchange Act. Most, if not all, of those victims can’t have their day in court.

Moreover, even though it was mandated by the Dodd-Frank financial reform act, the SEC has yet to establish an investor advocate office, despite the fact, as Aguilar notes, some 84% of Americans surveyed want government to get involved in better investor protection.

The SEC is also still dithering over rules for the JOBS Act, which would allow crowdfunding for stock offerings and fiduciary rules for brokers. Of the latter issue, the Institute for the Fiduciary Standard is rightfully concerned that the SEC will water down this important rule to afford brokers more protection than investors.

Investors have so few safeguards as it is, that any government agency looking out for them is a beacon in a storm.

When Aguilar says that “a client’s right to go to court to recover monetary damages is an important right that should be preserved and kept in the client’s toolkit,” he’s not talking about employing more lawyers. He’s talking about giving investors the protection they deserve because the agency created to protect them isn’t doing its job.


Posted by Steven Maimes, The Trust Advisor


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Mary Jo White, New SEC Chair, May Not Participate In Key Enforcement Decisions In First Year

Wall Street has a new top watchdog, but it isn’t clear whether she will be in the room as her agency makes key decisions about whether to pursue some of the financial sector’s biggest stars.

mary_jo_white_tta_feature_image,jpgMary Jo White, a former federal prosecutor who has spent the last decade as a lawyer defending banks, was confirmed by the U.S. Senate on Monday as the new head of the Securities and Exchange Commission. White pledged not to participate in SEC decisions for one year in matters involving former clients, which include Bank of America, JPMorgan Chase and Morgan Stanley. She also vowed not to return to the New York law firm Debevoise & Plimpton.

Foremost among the tough decisions the SEC will likely have to make in the next year: whether to sue JPMorgan Chase executives, including CEO Jamie Dimon, for false statements as the $6.2 billion “London whale” trading loss unfolded. White represented JPMorgan Chase, the nation’s largest bank, from 2010 through 2012 in a range of financial crisis-related cases. Though White hasn’t said for sure in what instances a past relationship will prompt her to recuse herself, it seems likely that any high-profile enforcement matter involving the megabank will be made without her input for the next year.

White, a respected former federal prosecutor, takes over an agency with a reputation damaged from its failure to sound warning on risk-taking in advance of the financial crisis, and for failing to catch Ponzi-king Bernard Madoff. The agency has taken some steps to rehabilitate its image, with its enforcement division bringing more cases and winning more big-dollar settlements than ever.

Critics contend that the SEC, the agency that regulates Wall Street, still hasn’t done enough to hold accountable those responsible for the housing bubble and economic crash. Though the agency has brought cases that target Wall Street banks, it has largely avoided charging top executives. The SEC is a civil law authority, which means it has the power to sue, but not to bring criminal charges.

In a recent Senate hearing, White promised that “no institution would be too big to charge.” She also said she would pursue a “fair but bold and unrelenting” enforcement policy. She said she will step aside when matters involving former law clients come before her.

“I think the public investor should know that I am their advocate,” White said during her confirmation hearing. “If I’m confirmed, the American public will be my client. And I will work as zealously as is possible on behalf of them.”

Though it fell short of asserting that any securities laws were broken, a recent report by the Senate Subcommittee on Investigations left little doubt that its authors felt that JPMorgan’s top officers failed on the job. Sen. John McCain (R-Ariz.) said the London Whale trade was not the action of “rogue traders” and bank “superiors were well aware of their activities.”

White may also have to bench herself during a forthcoming arbitration involving exchange operator NASDAQ and several large banks. The banks, including former White client UBS AG, have argued the stock exchange should be liable for bank losses during Facebook’s botched initial public offering.

Other former clients whose actions might come into the SEC’s purview include General Electric, Microsoft, Deutsche Telekom and Verizon. And these are just the clients White has publicly revealed. In her financial disclosures, White mentioned three clients she could not name, citing attorney-client privilege.

It remains to be seen if White would excuse herself from cases involving Deloitte, one of the largest accounting firms in the world. Deloitte, a White client, audited 920 publicly-traded American companies in 2011, according to the company’s latest annual filings. In December, the SEC sued Deloitte’s Chinese unit for obstructing a fraud investigation.


Posted by Steven Maimes, The Trust Advisor



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