Posts Tagged sec
SEC Official: Common Wall St. Conversations Carry ‘Troubling’ Potential For Abuse
Posted by Steven Maimes in Headlines on February 16, 2012
The Securities and Exchange Commission might betaking a closer look at common Wall Street practices that occupy an ethical gray area.
Certain routine conversations in the business world carry the potential for abuse, and can often be “troubling,” David Rosenfeld, co-head of enforcement at the SEC’s New York office, told a group of legal and financial practitioners earlier this month, according to Fox Business News. Some see the comments as a hint that the SEC may consider “expanding the definition of insider trading,” according to the report.
The SEC has been taking an aggressive stance against insider trading in recent months, with Chairman Mary Schapiro calling it a “problem of tremendous magnitude,” and the agency filing more than 100 cases related to insider trading between 2010 and 2011.
Among the SEC’s highest-profile cases ever was the successful prosecution of Raj Rajaratnam, a hedge fund billionaire who thanks to inside information made lucrative trades of Goldman Sachs and Google stock, among others.
At the same time, critics of the SEC say the agency’s focus is misplaced, and that it has done little to punish the people and institutions that helped bring about the financial crisis of 2008 — a near-meltdown of the national banking system in which insider trading played a relatively minor role.
For its part, the SEC says it has shifted its approach to financial-crisis prosecution cases in order to generate more charges that might stick. Meanwhile, the agency has pointed to its own record on insider-trading cases as proof that it is serious about stamping out financial misconduct.
SEC representatives have also complained that the agency simply doesn’t get enough federal funding to be as effective as it could be. In 2011, the budget for the SEC was $1.185 billion.
A spokesman for the SEC has indicated that Rosenfeld’s remarks this month don’t necessarily point toward an expansion of the agency’s definition of insider trading.
Source: Huffington Post
Posted by Steven Maimes, The Trust Advisor.
Permalink: http://thetrustadvisor.com/headlines/sec-1
SEC Says Adviser Defrauded Investors Using LinkedIn
Posted by Steven Maimes in Headlines on January 4, 2012
Securities regulators charged an Illinois-based investment adviser on Wednesday with using LinkedIn and other social media networking websites to lure investors by offering more than $500 billion in fake securities.
The Securities and Exchange Commission alleged that Anthony Fields, 54, of Lyons, Illinois, made the fraudulent offers to sell securities through two sole proprietorships — Anthony Fields & Associates (AFA) and Platinum Securities Brokers.
The agency said Fields provided false and misleading information about clients, assets under management and even the history of his firm’s business.
The SEC said Fields, for example, lied on forms he filed with the commission by claiming to have $400 million in assets under management — when he fact he had none.
The SEC also alleged that he violated numerous other securities regulations by failing to maintain adequate books and records or carry out proper compliance procedures. Fields held himself out as a broker-dealer even though he never properly registered with the SEC, the agency said.
Fields, who is representing himself in the case, could not immediately be reached for a comment.
The SEC’s enforcement action against Fields comes as it has increased scrutiny of the use of social media in the financial services industry.
Last year, the SEC launched a broad review of outdated securities regulations that have not kept pace with the evolution of social media sites such as LinkedIn and Facebook.
As part of the review, the SEC is looking at whether to loosen regulations that ban general solicitations for private securities offerings.
Congress is also considering legislation to ease rules that restrict private companies’ capital raising efforts, but both Congress and the SEC are trying to carefully craft any reforms to ensure they do not erode investor protections.
On Friday, the SEC’s Advisory Committee on Small and Emerging Companies will discuss whether to recommend relaxing current restrictions on general solicitations for securities offerings.
INVESTOR ALERTS
The SEC on Wednesday used the enforcement case against Fields as an opportunity to make an example of the issue by warning investors about the dangers of online scams.
It also urged investment advisers to be more cautious about their use of social media to attract clients.
The agency issued two alerts on social media usage. One, targeting investment advisers, said SEC examiners have noticed that firms often have “multiple overlapping procedures” that apply to advertisements and client communications, and those procedures may not always specifically apply to social media.
“Such lack of specificity may cause confusion as to what procedures or standards apply to social media use,” the SEC said in its alert. “Many procedures were also not specific as to which types of social networking activity are permitted or prohibited by the firm and many did not address the use of social media by solicitors.”
The second alert offered tips to help investors avoid fraudsters who use the Internet to attract business.
“As investment advisers increasingly utilize social media to communicate with clients and potential clients, firms need to be mindful of the applicable standards governing those communications,” said Carlo di Florio, the director of the SEC’s Office of Compliance Inspections and Examinations.
Source: Reuters
Posted by Steven Maimes, The Trust Advisor.
SEC says “Accredited Investors” Can No Longer Include Personal Residence in Net Worth
Posted by Steven Maimes in Headlines on December 23, 2011
U.S. securities regulators adopted new rules on Wednesday designed to protect less sophisticated people from investing in private placements and other securities offerings with less regulatory oversight.
The U.S. Securities and Exchange Commission’s new rule, which was required by last year’s Dodd-Frank Wall Street overhaul law, would exclude the value of a person’s home from net worth calculations that are used to determine who is an “accredited investor.” Only accredited investors who have a net worth of $1 million or more can participate in certain private placements and offerings that are not registered and do not require certain disclosures.
The rule comes on the heels of the 2007-2009 financial crisis, where home values plummeted and many investors lost money in sophisticated, mortgage-related securities instruments.
The SEC said it had made a few amendments to the final rule in response to comments from the public.
In one instance, the SEC agreed to “grandfather” people who were previously deemed “accredited investors” to continue relying on the old definition to qualify for certain follow-on investments.
The agency also tweaked language related to the treatment of borrowing secured by a primary residence for calculating one’s net worth.
Under the final rule, indebtedness secured by a person’s home up to the estimated fair market value of the home will not be treated as a liability unless the borrowing occurs in the 60 days preceding the purchase of the exempt securities offering.
“This is intended to prevent manipulation of the net worth standard, by eliminating the ability of individuals to artificially inflate net worth under the new definition by borrowing against home equity shortly before participating in an exempt securities offering,” the SEC said.
The new net worth standard will take effect 60 days after it is published in the Federal Register. The SEC will also review the “accredited investor” definition every four years to see if it needs to be updated.
With Wednesday’s rulemaking, the SEC said it has now proposed or adopted more than three-quarters of the nearly 100 rules required under the Dodd-Frank law.
Source: Reuters
Posted by Steven Maimes, The Trust Advisor.
SEC sues SIPC over Allen Stanford’s Alleged $7 Billion Ponzi Scheme
Posted by Steven Maimes in Headlines on December 14, 2011
Federal securities regulators on December 12th sued a brokerage industry backed fund on behalf of victims who lost money in Allen Stanford’s alleged $7 billion Ponzi scheme and have yet to recover any funds.
The U.S. Securities and Exchange Commission asked a federal court to order the Securities Investor Protection Corporation to begin a proceeding that would allow Stanford investors to file claims for coverage with the fund.
“Because SIPC has declined to take steps to initiate the proceeding for the protection of Stanford customers, the commission filed suit today asking a court to compel it to do so,” the SEC said in a statement.
Stanford, 61, was arrested in 2009 and faces a 14-count criminal indictment over an alleged $7 billion scheme linked to certificates of deposit issued by his Antigua-based bank. The SEC has also filed civil charges against him.
SIPC, which handles claims for investors if their brokerage fails, previously said in 2009 it did not believe Stanford customers who bought certificates of deposit (CDs) through the U.S. brokerage arm of Stanford’s company were eligible to receive compensation because the customers, rather than the brokerage, held custody of the CDs.
“We have great sympathy for the victims, but after a thorough examination of our statute, we don’t believe that Congress gave us the authority to act in this instance,” Stephen Harbeck, president and chief executive of SIPC, said.
The CDs were all issued by Stanford’s offshore bank in Antigua and marketed through U.S. and international brokerage offices.
The SEC rejected SIPC’s argument in June and issued a statement that called on SIPC to institute a liquidation proceeding. The SEC had said it would be forced to file a court action if SIPC did not comply.
Source: Reuters
Posted by Steven Maimes, The Trust Advisor.
Permalink: http://thetrustadvisor.com/headlines/stanford
DOL, SEC Mount New Effort to Rid Industry of 401(k) Fee Abuses and Overcharging
Posted by Scott Martin in Headlines on November 6, 2011
Lawyers warn that the Labor Department is working more closely with the SEC to investigate widespread abuses and conflicts of interest. Qualified plan providers react and are conducting fire drills and mock audits.
The Department of Labor has grabbed the SEC’s regulatory baton and started hunting for “improper or undisclosed” compensation, forcing advisors to decide whether to face a new sheriff or run for the hills.
“We are aware of several broker-dealers recently receiving letters initiating DOL investigations,” says Bruce Ashton, a partner in national law firm Drinker Biddle’s Los Angeles office.
News of the audits come as a shock to many in the industry who spent most of the year waiting for DOL to release new guidance on what advisors who work with retirement plans will and won’t be able to do. Read the rest of this entry »
Feds to Target Trust Firms for Reg R Violations
Posted by Scott Martin in News on June 12, 2010
Compensation tests start in six months. Fiduciaries still have questions about what they need to show the examiner to prove that they’re pushing out commission-based securities sales.
Bank examiners have started checking on trust companies to make sure that everyone can either demonstrate that they’re obeying Regulation R, even though the specifics still perplex industry veterans.
Regulation R mandates that non-SEC-regulated institutions “push out” or refer most securities sales—and the commissions they generate—to broker-dealers. Fiduciaries can get a pass if they can prove that no more than 30% of their revenue comes from commissions.
Because this is a new requirement, not all trust companies are sure they’ll have what it takes to convince the Office of the Comptroller of the Currency’s examiners that they’re exempt when compliance testing starts on January 1.
“We’re all still waiting on record-keeping guidance,” Sally Miller, who chairs the American Bankers Association’s banking law committee, told me.
“I understand it has been drafted, but with everything else going on right now in the regulatory world, review has been slow,” she added. “It just hasn’t been a top priority.”
Caught in the middle
On the surface, the rules are clear. A fiduciary can book up to 30% of its revenue (calculated on a two-year rolling basis) from trading fees that it earns in the course of exercising its duties. All other stock and mutual fund trading needs to be pushed out.
“You don’t want to make any mistakes on this one,” warns securities lawyer Melanie Fein, who wrote the Securities & Exchange Commission’s Reg R compliance manual.
Fein acknowledges that a lot of the confusion out there stems from the fact that trust companies—especially those with state charters—occupy a somewhat nebulous position on the national regulatory map.
While trust departments affiliated with FDIC-insured banks are clearly under the OCC eye, an independent trust company operating under state jurisdiction may normally consider itself aloof from the banking world.
Fein says that’s not really an issue here. State-chartered trust companies may not be OCC-regulated banking entities, but it’s the SEC they ultimately need to convince that they’re operating on the right side of the line. And all trust companies look alike as far as the securities regulators are concerned.
“The term ‘bank’ at the SEC includes the term ‘trust company,’” Fein told me. “What a Reg R exemption means is that you are exempt from their regulation. They are not really concerned with who regulates your other activities.”
This is the real danger of failing the compensation test, Fein says. A trust company that does too much commission-based business actually loses its exemption from SEC oversight.
“If it turns out you are not exempt, you would be operating as an unregistered broker-dealer and would be liable for your customers’ losses,” she explains.
Plenty of questions remain…
In theory, a bank can get around the 30% rule by making sure all employees maintain a strict “two-hat” separation between commission-based and relationship-based business. As long as a securities-licensed bank employee takes off the “bank” hat to trade, the bank can avoid from SEC oversight.
While this may look feasible on a superficial level, every securities lawyer I talked to warned me that keeping the hats separate is an operational and supervisory nightmare for banks and broker-dealers alike.
As a result, some compliance departments on both sides of the bank/broker divide take a more restrictive position than advisors might like. That’s their perogative, but it can be frustrating.
“Our broker-dealer takes the position that independent trust companies are not exempted under Reg R,” Jim Farmer, a wealth manager at First Bankers in Quincy, Illinois, told me. “They will pay commissions to the bank, but not the trust company. I understand the two-headed issue, but sometimes I still feel stuck.”
Most banks and trust companies will simply pass the business to a favored broker and collect a fee. Sally Miller at the ABA says most of the Reg R questions she gets revolve around how the examiners will look at these referral fees.
“This is the tougher nut to crack for some of the banks out there,” she told me. “Is this commission-based or relationship-based income? And what will the OCC think is fair?”
Red-flag referrals
Miller says there are a few practices out there that trust companies should avoid if they want to keep their Reg R exemption.
Referral compensation should not be tied to either the size of the account or trade at stake or the broker-dealer’s success in getting the business. Doing this raises the odds that a payment may actually be a commission in disguise, Miller told me.
These fees should also never be tied to any kind of incentive program. The rationale here is that pushing out securities business is supposed to be a sacrifice, not a business opportunity for trust companies to chase.
“Staying exempt under Reg R means proving that you’re primarily interested in lending, cash management, trust administration or other traditional banking activities,” Miller says. “If you tell your employees they’ll get a bonus for turning over prospects to broker-dealers, it doesn’t look good.”
Although the OCC has yet to issue concrete guidance, examiners have been actively working with banks and trust companies to make sure everything is going well. If a trust company still has any questions about what it will need to pass the test, there’s plenty of time to find out, Miller says.
Melanie Fein emphatically agrees.
“Confer with your regulator and clarify your status,” she told me. “Whether you’re FDIC-insured, state-chartered, OCC-regulated, go ahead and make the call. This is very definitely serious business.”
For follow-up, we suggest reading an excellent article on compliance, published by the Federal Reserve Bank of Philadelaphia, “Regulation R: Is Your Bank in Compliance?.”
Scott Martin, contributing editor, The Trust Advisor Blog, Jerry Cooper contributed to the reporting, Steven Maimes contributed to the research and editing
Permalink: http://thetrustadvisor.com/news/regr
SEC’s Top Cop Says Agency to Police Collective Investment Trusts
Posted by Scott Martin in News on April 17, 2010
Collective funds are by law on the turf of bank regulators. But the SEC’s new anti-Madoff crusade now wants to put collective products on agency’s hit list.
“The SEC can’t get into the bank, but I can get into the advisors. It’s important for me to see if the banks are using their exemption properly … or merely renting a space [to advisors] inside a trust company,” says SEC’s Andrew “Buddy” Donohue, head of the SEC’s investment management unit.
Donohue fired a warning shot at bank regulators by threatening to go after the advisors who sell collective investment trusts. Experts say a move like that may just be saber rattling, but it pits the SEC against bank regulators over oversight of about $1.6 trillion in the collective funds market.
On the surface, these vehicles—also known as collective trusts, commingled funds or common trust funds—look a lot like institutional mutual funds and invest in all the conventional asset classes. Advisors do brisk business selling them to retirement plans.
But while mutual funds are SEC-registered, collective investment trusts are managed by a bank trust department and so falls under the jurisdiction of the Office of the Comptroller of the Currency, which is part of the Treasury Department.
If Donohue gets his way, that may change. In a speech at Practicing Law Institute’s Investment Management Institute in New York, he said he’s got his eye on these bank products. If he decides they need tighter regulation, he’ll make it happen, one way or another.
“I can’t get into the bank,” he reportedly elaborated in an off-script comment after the speech. “But I can get into the advisors.”
The OCC has refused to rise to the bait so far. All I got out of them was a terse “we’re aware of it and no comment.”
Rattling the Chains
Longtime agency watchers are a lot more expansive, but on the whole they’re a little mystified at what you could read as an SEC power grab.
“Collective investment trusts used to be considered a settled matter,” Maureen Young, a partner at high-powered law firm Bingham McCutchen, told me.
“If the SEC is really concerned about these products, maybe they’re hoping that they can get some response by rattling the chains and going after the brokers,” she added.
George Washington University law professor Arthur Wilmarth filled me in on the long struggle over who would regulate these products following the repeal of the Glass-Steagall Act over a decade ago.
“As they say, nothing is as precious in Washington as a bit of turf,” he told me. “They fought for years and just couldn’t agree,” he added. “It took Congress basically threatening to bang the agencies’ heads together to get the job done.”
By the time the last dust settled, it was already 2007 and the once-obscure collective investment trust was becoming big business in retirement plans.
There’s about $1.6 trillion invested in these trusts now, according to Morningstar data. About half of it is in traditional pension funds; the other $800 billion—the real growth market—is in 401(k)s and other defined contribution accounts.
Getting Tough
Some of the people I interviewed for this story suspect that the size of this marketplace is the factor that brought it to the SEC’s attention after years of letting the OCC tend its own knitting.
Others wonder whether the SEC is looking for ways to prove that it’s indispensable in a world where the Obama Administration seems intent on reshuffling the regulatory deck and all the agencies have made mistakes.
In any event, Donohue isn’t alone in talking tough.
“We simply show up,” said Gene Gohlke, associate director of the SEC’s Office of Compliance, Inspections and Examination, speaking at the same conference as Donohue.
“If there are allegations of wrongdoing, we don’t want to give firms a good deal of lead time to clean up,” he added.
But while statements like this paint a tough picture of the commission as a sort of rapid-deployment vigilante regulator, it’s going to be tough to put that rhetoric into practice, former Nevada banking commissioner L. Scott Walshaw told me.
“From a bank regulator’s perspective, the OCC or whoever else is being stepped on is going to have something to say about this,” Walshaw, now a regulatory advisor at Advisors Institutional, says.
“Common sense would dictate that it makes more sense to just sit down with the OCC and maybe see if they can express their concerns without infringing on anybody’s turf,” he added.
Headed for the Mainstream
Meanwhile, there are already 1,200 collective investment trusts in Morningstar’s database and more launching all the time.
“We talk to established money managers about these vehicles every week,” says Steve Deutsch, who leads the company’s research in this area.
Deutsch sees collective trusts heading for the mainstream of the asset management marketplace very quickly. That’s probably why the SEC is getting involved, he says.
“If you want to be mainstream, you’ve got to have all the features of a mainstream product, and I think that’s what the SEC is concerned about,” he added.
As Deutsch notes, these trusts already walk and talk a lot like mainstream investment products. Improved record-keeping capabilities allow them to report NAV on a daily basis. They trade on Fund/SERV. And since Morningstar tracks them, there’s third-party transparency.
Last but not least, they are already strictly regulated—not only by the OCC, but in so far as collective trusts are essentially retirement plan options, by the IRS, ERISA and the Labor Department.
For example, Victory Capital Management is a substantial player in this space with about $3 billion in collective trust assets under management.
“It’s not like there’s no oversight,” says John Kutz, the head of the company’s retirement plan business.
“There’s tremendous oversight. There’s a lot of auditing. These are fiduciary products. The OCC makes sure every ‘i’ is dotted and every ‘t’ is crossed, at least where we’re concerned.”
Victory is still bullish on the business, expecting its AUM to double in the next few years. Evidently, a little oversight is worth the effort.
Scott Martin, contributing editor, The Trust Advisor Blog. Steven Maimes contributed to the research.
Permalink: http://thetrustadvisor.com/news/sec
New SEC Custody Rule Boon for Directed Trust Providers
Posted by Jerry Cooper in News on March 19, 2010
Audit and compliance fees are sending RIA trustees to independent trust companies. Providers welcome the new business.
A new SEC rule that took effect last Friday leaves thousands of RIAs facing annual surprise audits and has triggered a surge of new business for trust companies that specialize in lightening the load.
The audits are part of a package of new rules adopted by the SEC last year in response to the Ponzi scheme perpetrated by Bernard L. Madoff. Under the new system, an advisory firm the SEC considers to have custody over client assets has to pay for an annual audit to properly account for all funds and trades.
According to SEC records, the new rule affects 10 percent of the 25,000 RIAs, including those who handle trust accounts for families, charities and retirement plans such as 401(k)s and ESOPS.
With few exceptions, trustees are now deemed to have custody, but advisors who let a corporate trustee handle the trustee work are off the hook.
Christopher Holtby, president of Wealth Advisors Trust Company, tells me that the new rule is a boon for companies like his, which specialize in doing just this.
“It lets us do your heavy lifting.” he said. Dan Ehrmentraut, JD is Wealth Advisors’ Director of Business Development, comes to Wealth Advisors Trust Company with over 20 years experience in the directed trust advisory business.
By partnering with a separate trust administrator, advisors can go on managing their clients’ assets without being considered the custody provider. The arrangement is known as a directed trust.
The decade-old trust feature that splits trustee and advisor into separate operations has become accepted practice for banks and trust companies nationwide. Trust Advisor Blog wrote a story several weeks ago that explained how they work.
I spoke to several accounting firms recently to determine how expensive the compliance audits will be. Estimates range from a low of $16,000 all the way to $100,000, largely depending on the stature of the firm.
The expensive part of the engagement involves an internal control report similar to a SAS‑70 audit, which must be received by the SEC within six months of becoming subject to the requirement. In addition, advisors must respond to new questions on a revised Form ADV.
Given these headaches, Christopher Holtby at Wealth Advisors Trust tells me that directed trust is a “win-win situation” because there aren’t any conflicts of interest and “if you work the math out, our fee is substantially lower than the compliance cost.”
Holtby’s firm is based in South Dakota, where trust rules are most favorable to advisors. His firm can also support dynasty and asset protection trusts, which are most desirable with high-net-worth investors to complement their estate plans.
MULTIFAMILY OFFICE PROVIDERS AFFECTED
Many advisors are still trying to work through compliance problems, says Valerie Baruch, assistant general counsel of the Investment Adviser Association, a Washington, D.C.-based trade group that has been on top of this issue since the beginning.
Over the last few months, advisors have wrestled with serious confusion as to who needed to comply. The SEC eventually posted clarifications on its website that dealt squarely with the central question:“If an employee of an advisory firm serves as a trustee to a firm, does the advisory firm have custody?”
The answer to the question, according to the SEC, is “yes.” However, the clarification, released only a week before the new rule went into effect, did not give advisors much time to shop for accountants or deal with the issue properly. While the Trust Advisor Blog received many questions from advisors over the last several weeks concerning this, the matter seems to have been laid to rest—for the time being.
In addition to advisors who serve as trustees, those who provide multifamily office services also come under scrutiny of the new SEC custody rules.
I spoke to Mari-Anne Pirsarri, a Washington, D.C.-based lawyer, who told me that any time an advisory firm has the ability to direct the custodian to pay a third party, the SEC says the advisor has custody.
David Newkirk, a managing director with Schwab Institutional, told me that when advisory firms serves as trustees or have the ability to tell us to send money to third parties, they effectively have trust custody. He added “We beat this question up pretty well,” he told me.
I also spoke to Steve Austin at Fidelity and that firm’s position is identical to Schwab’s. “It’s cut and dry,” he said. “The advisor has custody when they tell us what to do with the money.”
Mari-Anne Pirsarri told me the SEC has made additional clarifications (and a few exceptions) for multifamily office providers. For example, she says when a client calls up an advisor who is also a multifamily office provider and says, “Pay my taxes for $50,000,” that involves custody. However, if the client calls up the advisor and says, “Move my money from Schwab to Fidelity,” custody isn’t an issue.
She notes that there is so much confusion because, after awhile, the arguments start circling back on themselves. But the SEC means business, she says. “The SEC is not backing off on this one.”
Despite this, the SEC has made a few concessions. When the audits were first proposed last year, the SEC took the position that even deducting fees from client accounts represented custody. The SEC received over 1,000 letters and wound up agreeing that advisors who are simply authorized to collect their fees did not have true custody over their accounts.
Jerry Cooper, senior editor, The Trust Advisor Blog. Scott Martin contributed to the editing.
Permalink: http://thetrustadvisor.com/news/custody
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