SEC Probes Advisers With Access to Client Retirement Accounts, Approves Crowdfunding Rules Connecting Investors with Small Businesses

According to InvestmentNews, the Securities and Exchange Commission is looking at instances in which advisers have access to their clients’ financial accounts that they don’t manage. The SEC wants to make sure that these advisors are unable to take distributions from these accounts if they don’t have custody over them.

The SEC has been taking a closer look at custody since the Bernard Madoff Ponzi scam that bilked investors billions of dollars. Madoff was in control of most of his clients’ money.

In 2013, the regulator, seeking to stave off the next big investor scheme, noted that red flags were raised for 140 firms that were examined in 2012 because of they way they had access to or held the assets of clients. “Significant deficiencies” were found.

In examinations, the SEC discovered that a lot of advisers weren’t even aware of when they’d become account custodians-from serving as a client’s trustee, signing checks for clients, taking out money to pay their bills, and other actions.

The advisers that worked with a qualified custodian received citations for commingling proprietary, client, and employee moneys and failing to make sure that clients got quarterly reports regarding custodianship.

Part of the issue is that once advisers gain the trusts of clients, the latter may ask them for help managing other accounts, hence giving them access to these accounts.

In other SEC news, the regulator has adopted new rules that will allow small businesses, including start-ups, to sell stock online in order to raise funds. The regulator approved the equity crowdfunding standards, which establish the ways in which these businesses will be allowed to raise up to $1 million a year via the offering of shares on the Internet.

Under the 2012 Jumpstart our Business Startups Act the regulator was mandated to allow equity crowdfunding so that firms have an easier way to obtain money if they are unable to get venture capital or bank loans. The model is based on platforms like the ones created by Indiegogo and Kickstarter. Those platforms were established to let entrepreneurs, artists, and others ask for donations to fund their projects.

All investors will have access to crowdfunded shares. However, those with a net worth or income that is below $100,000 would only be allowed to invest $5,000 maximum every year, while investors who make more than that $100,000 would be able to invest up to 10% of their net worth or yearly income, but no more than $100,000 a year.

Those who purchase stock will be required to hold it for a one-year minimum before they can sell. The crowdfunding, although done through the Internet, must either go through a funding portal that offers financial information about the companies while disclosing how much money it makes for its role or a broker.

Businesses would not be allowed to raise over $5 million. State regulators would oversee these deals.

Our stockbroker fraud law firm represents investors that have lost money because of the negligence or wrongdoing of parties in the securities industry. It is important that you have legal representation so that you can get the maximum financial recovery possible.

SEC cracks down on advisers’ access to clients’ outside accounts, Investment News, October 22, 2015

SEC Proposal on Crowdfunding (PDF)

Final Rule (PDF)