April 14, 2012

AARP, Investment Adviser Association, Among Groups Asking the SEC to Make Brokers Abide by 1940 Investment Advisers Act’s Fiduciary Duty

Several industry and consumer groups have written a letter to the Securities and Exchange Commission asking it to put into effect a uniform fiduciary standard for both investment advisers and broker-dealers. The groups are AARP, National Association of Personal Financial Advisors, Fund Democracy, Certified Financial Planner Board of Standards, Inc., Consumer Federation of America, Financial Planning Association, and the Investment Adviser Association. They want the SEC to extend the duty as it exists under the 1940 Investment Advisers Act to brokerage industry members and not just investment advisers.

“This has been my position since the subject arose. No new definition of ‘fiduciary duty’ is warranted. For hundreds of years laws and legal decisions have fully defined the term,” said stockbroker fraud lawyer William Shepherd. “ Why should this not simply apply to Wall Street as it does the rest of us, including lawyers?”

Currently, broker-dealers have to abide by the “suitability" standard, which is considers a less strict standard of care. For example, under the suitability standard, brokers don’t have to reveal the majority of conflicts of interest to a client to get out of any obligation to control investment expenses.

Last year, the SEC recommended that its staff engage in rulemaking to create a uniform fiduciary standard. The finding was a result of a study mandated by the 2010 Dodd-Wall Street Reform and Consumer Protection Act. After the study was released, the brokerage industry started advocating for a completely new standard. Last summer, the Securities Industry and Financial Markets Association also recommended that the Commission set up a framework that is separate and distinct from the existing statutory standard.

SIFMA wants the SEC to create “detail and structure” that would let broker-dealers apply the standard according to their own business models. The securities industry trade group also recommended that key principles be tackled, including the three main principals of a uniform standard, the definition of “personalized investment advice,” clear specification regarding obligations, preservation of principal transactions, and the set up of distinct guidance on disclosure.

In their letter to the SEC, the groups said that although they were in agreement with many components of the framework that SIFMA is recommending, there are others that they strongly oppose. For example, they are concerned that the proposed framework fails to meet Dodd-Frank’s requirement for brokerage firms and investment advisers to have the same standard and that it be “no less stringent” than any standard that is already in place. They also didn’t like the recommendation that the Commission give clear guidance about disclosure for the new fiduciary framework.

Financial Planning Association, e Certified Financial Planner Board of Standards, and the National Association of Personal Financial Advisors—all adviser groups—don’t want there to be an advisor SRO, which SEC staff had recommended in another Dodd-Frank mandated study.

Our securities fraud law firm represents investors, both individual and institutional, throughout the country. Contact Shepherd Smith Edwards and Kantas, LTD, LLP today.
 
A Standard for Brokers, The New York Times, August 26, 2011

Investment Advisers Act of 1940, SEC.gov (PDF)

A fiduciary relationship is generally viewed as the highest standard of customer care available under law, SIFMA


More Blog Posts:
Don’t Create Uniform Fiduciary Standard for Broker-Dealers and Investment Advisers, Say Some Republicans to the SEC, Institutional Investor Securities Blog, October 7, 2011

FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty, Institutional Investor Securities Blog, November 28, 2011

SEC’s Proxy Access Rule is Rejected by Appeals Court, Stockbroker Fraud Blog, August 5, 2011

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Posted In: Broker-Dealers , Investment Advisers , SEC

February 25, 2012

SEC Revises Dollar Amount Thresholds Determining Whether to An Advisory Client Would Have to Pay Performance Fees

The Securities and Exchange Commission is adopting changes to the dollar amount thresholds, under the 1940 Investment Advisers Act, that are used to determine whether an advisory clients can be made to pay a performance fee. Per the current provision, an adviser has to be managing at least $750k of the client’s money or the adviser must have reasonable grounds for believing that the client’s net worth is over $1M. However, per the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 418, the SEC has directed that inflation adjustments to the dollar amount tests would be made every five years.

Last year the SEC put out an order modifying the “qualified client” assets management test from $750K to $1M. The test for net worth was changed from $1M to $2M. On February 15, 2012, the SEC said it was adopting these amendments to the Advisers Act’s Rule 205-3.

Per the amended rule, an individual’s primary residence worth and specific debt related to property would not be included when determining the net worth calculation. The amended rule comes with a grandfather provision that lets advisers keep charging clients who were qualified clients prior to the rule change performance fees. The amendments will be in effect 90 days after they are published in the Federal Register.

In other SEC-related investment adviser news, certain affiliated advisers may be able to take advantage of a no-action decision letting multiple advisers use one registration form when preparing Commission registration documents. The registration requirement comes in the wake of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which modified exemption provisions of the Investment Advisers Act of 1940. As a result, hundreds of investment advisers must register with the SEC for the first time because they are no longer exempt.

These advisers have until March 30 to register with the SEC. However, seeing as processing takes about 45 days, February 14 is the better day to register by.

In January, the American Bar Association’s Business Law Section sent a letter asking the SEC for interpretive direction regarding whether an adviser belonging to a group of related advisers in a controlled relationship dealing with one advisory business can fulfill their registration requirements with just one registration. The letter noted that certain business models have a single structure made up of many entities that now have to register with the SEC. The structures were established so that certain liability and tax matters were addressed or so that portfolio managers could give advice to different funds according to different investment strategies and goals.

SEC Division of Investment Management Branch Chief Tram N. Nguyen, in a no-action letter, acknowledged that while Form ADV, which is for registering, is supposed to be used by just one adviser, the Commission was aware that for certain advisers, using a single form might be appropriate.

Advisers wanting to avail of the no-action later have to satisfy certain criteria. For example, each adviser who is part of a joint registration submission with the SEC has to operate under ethical code and one set of procedures and policies. They also must advise just private funds and separate qualified account clients.

Shepherd Smith Edwards and Kantas, LTD, LLP represents individual and institutional investors. Contact our securities fraud lawyers today.

SEC Tightens Rules on Advisory Performance Fee Charges, SEC, February 15, 2012


More Blog Posts:
Senate Passes Bill Banning Congressional Insider Trading, Institutional Investor Securities Blog, February 8, 2012

With Confirmation of Richard Cordray as Its Director, The Consumer Financial Protection Bureau Can Finally Get to Work, Institutional Investor Securities Blog, January 4, 2012

SEC and SIPC Go to Court to Over Whether SIPA Protects Stanford Ponzi Fraud Investors, Stockbroker Fraud Blog, February 6, 2012

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Posted In: Investment Advisers , SEC

October 5, 2011

SEC & DOJ File Charges Against San Francisco Investment Adviser For Alleged “Soft Dollar” Fraud

The Securities and Exchange Commission is suing investment adviser Kurt Hovan for allegedly misappropriating $178K in “soft dollars” that he claimed was used for investment research. The federal agency contends that, in fact, the money was used to cover other business-related expenses. When Kurt, as Hovan Capital Management president, was asked to provide documents supporting this, he generated bogus research reports. Meantime, the US Department of Justice is charging the 43-year-old with obstruction and mail fraud.

Soft dollars are rebates or credits. They come from brokerage firms on commissions for trades made in investment adviser’s client accounts. If the soft dollar credits are disclosed appropriately, the IA may keep the credits and use them to cover expenses related to a specific area research and brokerage services benefiting clients.

The SEC contends, however, that Kurt didn’t solely use the soft dollars for research services. Instead, $166,667 was used to pay for the salary of his brother Edward Hovan. Soft dollars were also used to pay for computer hardware and office rent. Edward and Kurt’s wife Lisa Hovan (Hovan Capital Management’s chief financial officer) are also named in the SEC’s complaint. The SEC is accusing all three of them for violating federal securities laws’ antifraud provisions. Kurt Hovan and HCM are also accused of recordkeeping violations.

The securities lawsuit also claims that conceal their soft dollar-related activities, Kurt, Lisa, and Edward set up a "Bolton Research,” which was a shell company that Edward Hovan secretly controlled. The company then billed Hovan Capital Management’s brokerage companies for research that was never conducted. Edward allegedly kicked back $65,000 of payments to Kurt and Lisa.

The allegedly false reporting to the SEC is said to have taken place during a January 2010 examination of HCM. Staff requested that the financial firm give over copies of the research reports that Bolton Research had prepared. Instead, Kurt allegedly gave the SEC phony research reports and doctored materials.

The SEC is seeking disgorgement with prejudgment interest, injunctive relief, and other financial penalties.

Securities Fraud
As you can see, securities charges and criminal charge can be filed against an investment adviser that commits securities fraud. You may want to file your own securities fraud lawsuit to recover your losses if you lost money because investment adviser misconduct was a factor.

Our securities fraud law firm knows that the thought of pursuing a financial firm to get your money back can be an overwhelming process, which is why you want to retain an experienced investment fraud lawyer that knows how to successfully pursue your recovery while protecting your rights.

SEC CHARGES BAY AREA INVESTMENT ADVISER FOR DEFRAUDING CLIENTS AND FALSIFYING DOCUMENTS DURING SEC EXAM, SEC, September 28, 2011

Belvedere investment adviser faces criminal charges in fraud case, Marin Independent Journal, September 28, 2011


More Blog Posts:
New Jersey Investment Adviser Who Pleaded Guilty to $11.5M Financial Fraud Gets 168-Month Prison Sentence, Stockbroker Fraud Blog, September 29, 2011

Investors Working with Incompetent Registered Investment Advisers Have Few Protections, Reports Bloomberg, Stockbroker Fraud Blog, August 11, 2011

Custodial Firms Get Tougher About Registered Investment Adviser Compliance, Stockbroker Fraud Blog, December 28, 2010

Continue reading "SEC & DOJ File Charges Against San Francisco Investment Adviser For Alleged “Soft Dollar” Fraud" »

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Posted In: Investment Advisers , Securities Fraud

September 29, 2011

New Jersey Investment Adviser Who Pleaded Guilty to $11.5M Financial Fraud Gets 168-Month Prison Sentence

Sandra Venetis, a New Jersey investment adviser has been sentenced to 168 months behind bars. Venetis had entered guilty pleas to che charges of securities fraud and transacting in criminal property. She also must pay $11,579,781 in restitution to the investors she defrauded.

The government had accused Venetis, who owns Systematic Financial Associates Inc., of soliciting her financial firm’s clients so that they would put their money in an “alternative investment program” that she ran separate from her registered investment advisory business. This was between 1997 and 2010. To get these clients to invest, she falsely told them the money was being used to pay for loans for doctors’ quarterly pension funds. There were even occasions when Venetis would tell these clients to liquidate their positions in securities so they could take part in her alternate program. 114 clients sent her about $16.7M.

None of the investors’ money went to any doctors—although she did make up fictitious physicians and forged real doctors’ names on promissory notes to make it look as if she was using her clients’ money in the manner promised. Venetis has admitted that not only did she not run a legitimate alternative investment program, but also that she created Systematic Financial Services Inc. so that she could run her financial scam. She acknowledges that she used some of the investor money to help cover her advisory’s operation costs.

It was last year that Venetis and three of her firms, Systematic Financial Services, LLC, Systematic Financial Services, Inc., and Systematic Financial Associates, Inc., settled SEC charges over the multimillion-dollar financial fraud. The Commission said that Venetis and her companies violated sections of the Securities Act of 1933, Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and the Investment Advisers Act of 1940. Relief defendants included Venetis LLC, which Venetis also owned and operated, her brother Kevin Persley, and her daughter Jennifer Venetis.

The Commission accused Venetis of telling investors that the Federal Deposit Insurance Corporation had guaranteed promissory notes that would make about 6-11% tax-free interest annually. Although investors believed their investments were paying for loans to doctors the money paid for Venetis’s business debts and personal spending, including travel abroad, property taxes, home mortgages, gambling, and money for relatives.

Venetis and the companies settled the charges and all agreed to the relief sought by the SEC, including enjoinment from future securities law violation, payment of disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and appointment of an independent monitor.

N.J. IA Sentenced to 168 Months After Pleading Guilty in $11.5M Fraud, BNA Securities Law Daily, September 12, 2011

SEC CHARGES NEW JERSEY INVESTMENT ADVISER IN MULTI-MILLION DOLLAR OFFERING FRAUD, SEC, September 2, 2010


More Blog Posts:
FINRA Tells Congress It Is Ready to Act as SRO for Investment Advisors, Stockbroker Fraud Blog, September 13, 2011

Investors Working with Incompetent Registered Investment Advisers Have Few Protections, Reports Bloomberg, Stockbroker Fraud Blog, August 11, 2011

Harvest Managers, Benchmark Asset Managers, and Investment Advisor to Pay $11.6 Million to Settle SEC Charges Over Allegedly Mishandled Client Funds, Stockbroker Fraud Blog, July 23, 2011

SEC Extends Temporary Rule Allowing Principal Trades by Investment Advisers Registered as Broker-Dealers, Institutional Investment Fraud Blog, January 13, 2011


Continue reading "New Jersey Investment Adviser Who Pleaded Guilty to $11.5M Financial Fraud Gets 168-Month Prison Sentence" »

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Posted In: Investment Advisers , Securities Fraud

September 13, 2011

FINRA Tells Congress It Is Ready to Act as SRO for Investment Advisors

Speaking before a House Financial Services Committee, Financial Industry Regulatory Authority Chief Executive Richard Ketchup said that the self-regulatory organization is ready to set up a new entity to oversee investment advisers and make sure they are in compliance with federal securities laws. Ketchum also said the SRO would hire experienced staff to do the job and that regulatory oversight to tailored to investment advisers would be put into place.

Currently, the Securities and Exchange Commission is the watchdog for investment advisers. Staffing issues, however, prevent the commission from doing a thorough and frequent job—checks are about once every 11 years. Last year, the SEC was only able to examine 9% of all registered investment advisers.

Yet there are many in the financial industry that have expressed a preference for this status quo, or, if change has to happen, they would like state regulators to do the job. Some have expressed worry that FINRA would uphold investment advisers to rules more that applicable to broke-dealers. Others are not sure that the SRO is up to the task. Many are still not happy with FINRA’s performance as a financial industry watchdog prior to financial crisis. (It is important to note that FINRA has taken some responsibility for not discovering the Bernard Madoff Ponzi scam earlier.)

Right now, the SEC and Congress are assessing new regulatory policies for investment advisers and broker-dealers. The commission has put out a study regarding:

• Setting up user fees that would pay for the SEC’s adviser exam program
• Handing over oversight of persons that are registered as both investment adviser and broker to FINRA
• Establishing a law that would allow for an SRO for investment advisers

A bill has been drafted calling for a new SRO for advisers, but it doesn’t specify whether that self-regulatory group would be FINRA or the SEC. The sponsor of the bill, called the Investment Adviser Oversight Act of 2011, is House Financial Services Committee Chairman Spencer Bachus, R-Ala. Bachus.

Meantime, the Investment Adviser Association has said that it doesn’t want an SRO for investment advisers. Its executive director, David Tittsworth, has said that an SRO would add expensive bureaucracy and create a burden for advisory firms. Tittsworth believes that SEC is the best organization to do the job and that imposing user fees is a less expensive alternative.

FINRA currently examines about 4,500 broker-dealers. If it were to oversee advisers, that would be an additional over 11,000 firms. The Securities Industry and Financial Markets Association, the Financial Services Institute Inc., the Association for Advanced Life Underwriting, the Consumer Federation of America, and the National Association of Insurance are among those that support appointing FINRA as the investment adviser SRO.

Our stockbroker fraud law firm has helped thousands of victims of broker fraud and investment adviser fraud recoup their losses.

Financial Services Committee Debates Changes to Advisor, Broker Regulations, Financial Planning, September 13, 2011

FINRA makes pitch to oversee investment advisers, Reuters, September 13, 2011

Finra oversight of advisers gaining 'mo, Investment News, September 13, 2011


More Blog Posts:
FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker Fraud Blog, April 8, 2011

Financial Services Institute Wants FINRA to Serve as SRO for RIAs, Stockbroker Fraud Blog, January 3, 2011

Former Texas Securities Regulator Says Self-Regulation of Securities Industry Does Not Work, Stockbroker Fraud Blog, July 6, 2011

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Posted In: FINRA , Investment Advisers

August 11, 2011

Investors Working with Incompetent Registered Investment Advisers Have Few Protections, Reports Bloomberg

According to Bloomberg.com, the registered investment adviser industry may offer little protection to investors who end up with an incompetent adviser. This, even though investment advisers, unlike brokers, are upheld to a fiduciary standard to make their clients’ interests a priority and charge fees rather than commissions.

With over 14,000 independent RIA firms controlling about $1.5 trillion of assets (says Aite Group), this is important for investors to know. Problems they could face include too high fees, inappropriate investments, and a hard time collecting on legal awards. Unfortunately, many investors would rather deal with their losses rather than spend the time and money to take legal action against a negligent registered investment adviser.

Currently, advisers who manage at least $25 million have to register with the SEC. If the amount under management is less than that then they must register with the states where they do business. On June 28, 2012, however, the threshold will go up to $100 million, which means that approximately 3,200 advisers will be subject to state rather than SEC oversight.

It was just this January that the U.S. Securities and Exchange Commission recommended that traditional brokers also be upheld to the fiduciary standard that RIAs must meet. Currently, the nation’s approximately 632,000 brokers have to fulfill a suitability standard requiring them to offer advice that meets a client’s needs at the time that the sale of the product is made.

Yet even with the fiduciary standard, advisers don’t have to disclose their performance history to prospective clients. Because SEC-registered advisers don’t have to deal with net capital requirements, some of those that are ordered to pay an investor award cannot afford to and don’t. Unlike brokers, who may face suspension of their registration suspended if they don’t pay, advisers must only disclose that they have unpaid judgment.

The nonprofit firm Sunlight Foundation says that more than 1 in 10 RIAs is subject disciplinary actions, including convictions for felony crimes. Last year, the SEC took 113 enforcement actions against investment firms and investment advisers. That said, legal settlements and arbitration awards have to be disclosed on an adviser’s ADV form, which an RIA must register with the states or the SEC. Customer disputes involving investment adviser representatives can also be found on the SEC Web site.

Advisers will usually include arbitration clauses in agreements requiring clients to work through disputes through JAMS private arbitration of the American Arbitration Association. However, standard initial filing fees can start in the high hundreds and go into the thousands of dollars. Additional fees that may follow run into the tens of thousands of dollars.

Consumer Federation of America investor protection director Barbara Ropers says that because the majority of advisers don’t accept commissions, they may have less conflicts of interests than brokers. However, where there can be a conflict interest is in the charging of adviser fees (usually range from under 1% to 2%) of assets under management, which can compel an adviser to plays clients in higher-fee or –risk investments.

The SEC reports that most federally registered investment advisers charge client fees based on the percentage of assets under management (just 9% of them get commissions). Some advisers, however, may be charging fees that are too high.

Our securities fraud lawyers represent clients who have suffered losses because an investment adviser or a broker dealer was negligent.


Related Web Resources:
Safeguards Scant for U.S. Investors as Registered Advisers Increase by 39, Bloomberg, July 6, 2011

Investment Advisers Could Arbitrate Through Finra Under New Plan, The Wall Street Journal, April 11, 2011

Protect Your Money: Check Out Brokers and Investment Advisers, SEC


More Blog Posts:
SEC Extends Temporary Rule Allowing Principal Trades by Investment Advisers Registered as Broker-Dealers, Institutional Investor Securities Blog, January 13, 2011
Financial Services Institute Wants FINRA to Serve as SRO for RIAs, Stockbroker Fraud Blog, January 3, 2011

Most Investors Want Fiduciary Standard for Investment Advisers and Broker-Dealers, Say Trade Groups to SEC, Stockbroker Fraud Blog, October 12, 2010

Continue reading "Investors Working with Incompetent Registered Investment Advisers Have Few Protections, Reports Bloomberg" »

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Posted In: Investment Advisers

July 30, 2011

Advisory Performance Fee Rule Limit Adjusted by the SEC

The Securities and Exchange Commission has issued an order raising the threshold for determining whether an investment adviser can charge performance fees to clients. The increase is because of inflation. It also executes a Dodd-Frank Wall Street Reform and Consumer Protection Act requirement.

Under the Investment Adviser Act’s Rule 205-3, investment advisers are allowed to charge performance fees if the client meets certain criteria. Two tests with dollar amount threshold are among these requirements.

Per the SEC order, an investment adviser can charge performance fees if it is managing at least $1 million for the client, or if the latter’s net worth is over $2 million. Either test has to have been satisfied at the time that the advisory contract is entered. Prior to this order, since 1998 the thresholds have been $750,000 and $1.5 million, respectively.

Under the Dodd-Frank Act, the Commission was required to set forth an order to take into account inflation by July 21, 2011. The new order will go into effect on September 19, 2011

The SEC has proposed amendments to Rule 205-3, including:
• Using the PCE Index as the inflation index to calculate the inflation adjustment rates to this rule, which would be updated every five years.

• Excluding the value of that person’s main residence and debt that the property securities when determining if someone is a “qualified client”.

• Letting an investment adviser and its clients keep existing performance fee arrangements that were set up when they entered into the advisory contract.

Investment Adviser Fraud
Unfortunately, there are investors who end up losing money because of investment advisor fraud. Our securities fraud lawyers can help you determine whether you have a case.

SEC Issues Order Raising Performance Fee Rule Dollar Limit to Adjust for Inflation, SEC, July 12, 2011

Read the SEC Rule (PDF)


Read the SEC's Final Rule on this Matter from 1998

Rules Under the Investment Advisers Act of 1940

More Blog Posts:
SEC to Up Dollar Thresholds for When an Investment Adviser Can Charge Investors Performance Fees, Stockbroker Fraud Blog, May 24, 2011

Investments Advisers Told to Look at Recent SEC Enforcement Actions When Preparing for Exams, Stockbroker Fraud Blog, April 20, 2011

No Need for New SRO Overseeing Investment Advisers, Says NASAA Official to Congress, Stockbroker Fraud Blog, April 10, 2011

Continue reading "Advisory Performance Fee Rule Limit Adjusted by the SEC " »

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Posted In: Investment Advisers , SEC

July 23, 2011

Harvest Managers, Benchmark Asset Managers, and Investment Advisor to Pay $11.6 Million to Settle SEC Charges Over Allegedly Mishandled Client Funds

Following SEC charges that they used material misrepresentations and omissions to misappropriate about $8.7 million from clients, family, and friends, Sam Otto Folin, Benchmark Asset Managers LLC and Harvest Managers, LLC have agreed to pay $11.6M in disgorgement, civil penalties, and prejudgment interests to settle the securities fraud allegations. By settling, however, they are not denying or admitting any misconduct.

The SEC claims that for about eight years (about ’02 – ’10) even though all three defendants sold securities in the two firms and in Safe Haven Portfolios LLC, with the promise to investors that money would go to private and public companies that possessed goals and intentions that were “socially responsible, part of these funds allegedly were diverted to pay past investors, Folin’s salary, and both firms' expenses. Harvest and Benchmark also allegedly issued “notes” to friends, and family advisory clients that they said were safe and conservative, while promising guaranteed interest rates that were above market. They then misrepresented the notes’ value on statements.

The SEC also accuses Benchmark and Folin of forming Save Have in 2004 under the guise of offering investments to a number of portfolios. They had clients place their money in Safe Haven From ’06 – ’09. They also allegedly made Save Haven pay more than $1.7M to Harvest and Benchmark as supposed “development” expenses, which weren’t actually expenses related to Safe Haven (and were allegedly improperly amortized) and made the latter issue over $3.9 million in loans to the two investment advisory firms.

SEC Charges Philadelphia-Based Registered Investment Adviser With Fraud, Sec.gov, July 12, 2011

Recent Fraud Cases Show Investors Must Remain Vigilant, Forbes, July 13, 2011


More Blog Posts:
SEC to Up Dollar Thresholds for When an Investment Adviser Can Charge Investors Performance Fees, Stockbroker Fraud Blog, May 24, 2011

Investment Manager Accused of Securities Fraud Must Pay Defrauded Clients Over $20 Million, Stockbroker Fraud Blog, November 10, 2010

SEC Charges Investment Adviser With Allegedly Making Unsuitable Hedge Fund Recommendations to Elderly Clients, Stockbroker Fraud Blog, October 15, 2010


Continue reading "Harvest Managers, Benchmark Asset Managers, and Investment Advisor to Pay $11.6 Million to Settle SEC Charges Over Allegedly Mishandled Client Funds" »

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Posted In: Investment Advisers , Securities Fraud

July 6, 2011

Former Texas Securities Regulator Says Self-Regulation of Securities Industry Does Not Work

According to Ex-Texas State Securities Board Denise Voigt Crawford, giving oversight of nearly 12,000 investment advisers to the Financial Industry Regulatory Authority to cut costs is a bad idea and one for which investors will end up paying the price. FINRA is Wall Street’s self-funded regulator. Already charged with overseeing brokers, it is now pushing to take over the U.S. Securities and Exchange Commission’s role as adviser regulator.

Crawford says that having FINRA oversee the industry’s activities doesn’t make sense when FINRA is the industry. She also points out that since the SRO was established in 2007, it hasn’t been successful in protecting investors, while imposing fines that are usually a fraction of the damages they sustained from securities fraud and other misconduct. Last year, FINRA fined members just $43 million while the SEC imposed over $1 billion in penalties.

Also, according to U.S. Securities and Exchange Commission data, investors who received FINRA arbitration awards usually got under half of what they initially sought. In 2010, FINRA ordered that harmed investors get $6 million in restitution, while the SEC ordered that investors recover $1.82 billion. However, through May of this year, FINRA had already ordered that investors who sustained losses get recoup $9.8 million. The SRO believes that it is ideally suited to do the job for a number of reasons, including its technological capabilities and resources and the fact that most advisers are already affiliated with broker-dealers.

FINRA says that it responded to all 3,208 complaints submitted by customers last year, and, when required investigated the allegations. This year, the SRO accelerated its enforcement efforts. Also, compared to 2010, FINRA has upped the fines it levied by 118% and made 463 disciplinary actions between January and May 2011.

Our Texas securities fraud lawyers
Related Web Resources:
Investors May Lose as Congress Saves Money on Adviser Oversight, Bloomberg, June 27, 2011

Industry blasts move that would expand Finra's authority over advisers, InvestmentNews, October 30, 2009

Texas State Securities Board

FINRA


More Blog Posts:
No Need for New SRO Overseeing Investment Advisers, Says NASAA Official to Congress, Stockbroker fraud Blog, April 10, 2011

FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker fraud Blog, April 8, 2011

Financial Services Institute Wants FINRA to Serve as SRO for RIAs, Stockbroker fraud Blog, January 3, 2011

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Posted In: FINRA , Investment Advisers , Texas Securities Fraud

May 24, 2011

SEC to Up Dollar Thresholds for When an Investment Adviser Can Charge Investors Performance Fees

The Securities and Exchange Commission says it will raise the dollar thresholds that would need to be met before an investment adviser can charge a client a performance fee. The monetary thresholds are related to two tests under the 1940 Investment Advisers Act that let investment advisers charge performance-based fees to “qualified clients.”

Under the Act’s Rule 205-3, advisers can charge performance fees in certain circumstances: The investment adviser needs to be managing at least $750,000 for the client or the advisers must reasonably believe that the client’s net worth is over $1.5 million. Shepherd Smith Edwards & Kantas LTD LLP founder and securities fraud lawyer William Shepherd says, “Sharing in performance is dangerous because the advisors can afford to take large risks with ‘other people’s money’ - risks that the investor may not be able to afford. A combined life savings of $750,000 is not a large sum for retirees, and what does it even mean to ‘reasonably believe’ someone has a net worth of $1.5 million?”

The SEC says that now it will issue an order to revise rule 205-3’s dollar amount tests to $1 million for assets under management and $2 million for net worth. It also proposed amendments to the rule, including:

• Excluding the individual’s primary residence when determining net worth.
• Providing a method to figure out future inflation adjustments of the dollar amount tests.
• Modifying the rule’s transition provisions to factor in account performance fee arrangements that were allowed when the client and the adviser entered into their contract.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 418, the SEC has until July 21, 2011 to adjust for inflation the dollar amount tests under Rule 205-3 of this year and after every five years from then on. The act has also directed the SEC to adjust under 1933 Securities Act the net worth standard of an “accredited investor” so that it doesn’t include that individual’s primary residence.

Related Web Resources:
SEC Issues Notice of Plan to Adjust Adviser Performance Fee Dollar Thresholds, BNA Securities Law Daily, May 13, 2011

SEC Publishes Notice Regarding Inflation Indexing of Performance Fee Rule, SEC.gov, May 10, 2011

1940 Investment Advisers Act

More Blog Posts:
Investments Advisers Told to Look at Recent SEC Enforcement Actions When Preparing for Exams, Stockbroker Fraud Blog, April 20, 2011

No Need for New SRO Overseeing Investment Advisers, Says NASAA Official to Congress, Stockbroker Fraud Blog, April 10, 2011

SEC Extends Temporary Rule Allowing Principal Trades by Investment Advisers Registered as Broker-Dealers, Institutional Investor Securities Fraud Blog, January 13, 2011


Continue reading "SEC to Up Dollar Thresholds for When an Investment Adviser Can Charge Investors Performance Fees" »

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Posted In: Investment Advisers , SEC

April 20, 2011

Investments Advisers Told to Look at Recent SEC Enforcement Actions When Preparing for Exams

Securities and Exchange Commission’s Office of Compliance Inspections and Examinations deputy director Norm Champ says that when preparing to be examined, investment advisers should look at recent SEC enforcement actions stemming from problems found during previous exams at other advisers. Champ made this suggestion last month at an American Law Institute-American Bar Association-organized investment adviser conference in New York. Champ says that his views were his own and that he wasn’t speaking for the SEC.

Two cases that he cited as ideal examples were SEC v. Venetis and In re AXA Rosenberg Group LLC. Champ said that three AXA Rosenberg entities ended up paying over $240 million over SEC administrative proceedings because of a key computing error in the Venetis case, which involved a multi-million dollar fraud scam over the sale of bogus promissory notes. Although senior management discovered the mistake, they decided not to tell the SEC. The commission suspected there was a problem when its examiners were prohibited from entering certain rooms.

Champ is suggesting that before an exam, investment advisers should figure out their risk areas and review compliance and control procedures. He says that the SEC chooses which advisers to examine based on complaints, tips, referrals, prior exam history, third party data (including information from regulators), commission filing data, affiliated business activity, firm size, disciplinary history, pay arrangements, and time between exams. Exam teams study the investment adviser’s control environment, engage with senior management, pay attention to interactions within the financial firm, and look at conflicts of interest, valuations, portfolio management, advertising, trade allocations, and custody of assets.

Our stockbroker fraud attorneys are dedicated to helping investors recoup their financial losses caused by investment adviser fraud.

Related Web Resources:
Securities and Exchange Commission

Office of Compliance Inspections and Examinations


More Blog Posts:
AXA Rosenberg Entities Settle Securities Fraud Charges Over Computer Error Concealment for Over $240M, Stockbroker Fraud Blog, February 10, 2011
FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker Fraud Blog, April 8, 2011

Custodial Firms Get Tougher About Registered Investment Adviser Compliance, Institutional Investor Securities Blog, December 28, 2010

Continue reading "Investments Advisers Told to Look at Recent SEC Enforcement Actions When Preparing for Exams" »

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Posted In: Investment Advisers , SEC

April 10, 2011

No Need for New SRO Overseeing Investment Advisers, Says NASAA Official to Congress

Florida's Office of Financial Regulation’s securities director Frank Widman says Congress should ignore calls for a new SRO to help the Securities and Exchange Commission oversee any investment advisers. Widmann spoke last month at the North American Securities Administrators Association's public policy conference in DC.

Widmann, who previously served as NASAA president said that rather than set up a new SRO for IA’s, Congress should concentrate on making sure that state regulators and the SEC are fully funded so they are able to do their job. Widmann says that unlike the SEC, the federal regulator, and state securities regulators, SROs aren’t sovereign. Widmann says that giving SROs too much independence has proven problematic in the past.

As our stockbroker fraud law firm reported previously, SEC staff recently put out a report recommending that Congress either set up at least one SRO to oversee investment advisers, impose user fees on industry members to support Office of Compliance Inspections and Examination’s probes, or appoint the Financial Industry Regulatory Authority as the SRO for investment advisers. FINRA is already the SRO for broker-dealers.

Also at the NASAA Conference was SEC Commissioner Luis Aguilar, who said that the federal regulator was in the process of putting into place a system to gather and examine data from money market funds. He says funding limitations at the SEC have impeded the system’s implementation. Aguilar called on the financial services industry to “re-dedicate itself to basic principles,” including those of meaningful disclosure, fair dealing, integrity, and good business practices.

Related Web Resources:
NASAA Official Says Congress Should Ignore Calls to Create New SRO, BNA Securities Law Daily, March 29, 2011


Speech by SEC Commissioner Luis Aguilar, SEC, March 28, 2011

North American Securities Administrators Association


More Blog Posts:
FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker Fraud Blog, April 8, 2011

SEC Staff Wants an SRO to Oversee Investment Advisers, Stockbroker Fraud Blog, January 31, 2011

Continue reading "No Need for New SRO Overseeing Investment Advisers, Says NASAA Official to Congress " »

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Posted In: Investment Advisers , Miscellaneous

April 8, 2011

FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO

Financial Industry Regulatory Authority CEO and Chairman Richard Ketchum says that if the SRO is chosen to regulate investment advisers, it will tailor its oversight to that industry. At a compliance conference run by the Financial Market Association and the Securities Industry last month, Ketchum said that advisers’ concerns that FINRA would not comprehend the IA model are “simply wrong.”

FINRA oversees some 4,560 brokerage firms. Ketchum says that the SRO would set up a separate affiliate that would supervise investment advisers, who would not be subject to the same rules as broker-dealers. He stressed the needs for more examinations to discourage securities fraud and check on compliance as two of the reasons why FINRA should become the regulatory agency over investment advisers.

Per a Securities and Exchange Commission study mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the agency’s Office of Compliance Inspections and Examinations only examines about 9% of the investment adviser industry each year. On average, an adviser is examined by the SEC once every 11 years. The study offered recommendations:

• The creation of a new SRO for investment advisers
• Giving FINRA jurisdiction over investment advisers
• Using user fees to fund the SEC’s exam program

Many investment advisers do not want FINRA to become their SRO and are pushing for lawmakers to increase SEC funding. Also opposing FINRA as the advisers’ SRO is the Investment Adviser Association, which alleges lack of accountability, transparency, and a bias toward the broker-dealer model.

Our investment fraud lawyers represent clients that have suffered financial losses because of investment adviser misconduct.


Related Web Resources:
FINRA: We Understand Investment Advisers, OnWallStreet, March 27, 2011

FINRA, if Empowered to Regulate Advisers, Will Tailor Oversight to Industry, Chair Says, BNA Broker/Dealer Compliance Report, March 30, 2011

FINRA


More Blog Posts:
SEC Needs to Keep a Closer Eye on FINRA, Says Report, Stockbroker Fraud Blog, March 15, 2011

SROs Immune from Broker-Dealer’s Lawsuit Over Bylaw Changes Related to Creation of FINRA, Says Appeals Court, Stockbroker Fraud Blog, March 7, 2011

FINRA Investigating Whether Broker-Dealers Providing Adequate Risk Controls to High-Frequency Traders, Stockbroker Fraud Blog, September 19, 2010

FINRA CEO Ketchum's Speech, FINRA, March 22, 2011

Continue reading "FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO" »

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Posted In: FINRA , Investment Advisers

January 31, 2011

SEC Staff Wants an SRO to Oversee Investment Advisers

Earlier this month, the members of the Securities and Exchange Commission's Division of Investment Management recommended that Congress either set up at least one self-regulatory organization that oversees investment advisers, impose “user fees” to fund examinations by the Office of Compliance Inspections and Examinations, or make investment adviser oversight the Financial Industry Regulatory Authority’s responsibility. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 914, the SEC is supposed to assess itself and make recommendations for improvement.

Per the SEC’s report, there is at this time inadequate resources for examining the over 11,000 registered investment advisers—a number that will likely go down by 3,350 in July when Dodd Frank’s Section 410 goes into effect and advisers with assets under management valued at $100 million or less will have to register with the state where their main place of business is located. That said, the growth in the industry is such that by fiscal year 2021 there may be up to 13,908 registered advisors with a collective worth greater than $70 trillion.

However, while industry groups will likely endorse a more influential FINRA or a new SRO, investment advisers believe that self-regulation’s rules-based nature is not compatible with their business model and government oversight and regulation would be better for them. FINRA believes that an SRO will be able to “augment” government oversight. In the past, FINRA has expressed willingness to take on this role.

It is important that brokers and investment advisers are properly supervised to decrease the chances of investment fraud. Our investment fraud lawyers represent investors who have suffered financial losses because of investment adviser misconduct or securities fraud.

Related Web Resource:
Study on Enhancing Investment Adviser Examinations, SEC, January 2011

Office of Compliance Inspections and Examination

Division of Investment Management

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Posted In: Investment Advisers , Miscellaneous , Securities Fraud

January 3, 2011

Financial Services Institute Wants FINRA to Serve as SRO for RIAs

The Financial Services Institute wants the Financial Industry Regulatory Authority to be the main watchdog over registered investment advisers. FSI, which represents 126 broker-dealers’ interests, endorsed FINRA in a letter to the Securities and Exchange Commission. Many of the broker-dealers that FSI represents are also RIAs.

FSI believes that not only has FINRA shown the ability to “equitably” distribute enforcement, examination, technology, and surveillance resources, but also, that the latter is knowledgeable about “the overlapping nature” of the services and financial products that both investment advisers and broker-dealers may offer. Coordinated Capital Securities, Inc. and 2010 FSI chair and president Mari Buechner believes that having a regulatory structure that puts the same emphasis on examining broker-dealers, investment advisers, and their affiliated financial advisers will improve investor protection.

Currently, pursuant to Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC is analyzing the need for improved oversight of investment advisers. Already, FINRA closely scrutinizes broker-dealers, while the SEC has acknowledged that insufficient resources prevents it from regularly inspecting over 11,000 registered advisers.

However, extending FINRA’s reach over investment advisers has generated controversy. FSI is the first business group to support giving FINRA this role. FINRA Chief Executive Officer Richard Ketchum wrote to the SEC last November noting that not only does there need to be an SRO for investment advisers, but also that his organization is willing to take on the part. Meantime, the North American Securities Administrators Association and the Investment Adviser Association continue to remain wary of both extending self-regulation and FINRA’s authority.

If you suspect that broker fraud or investment adviser fraud may have caused you to sustain financial losses, contact our securities fraud law firm today.

Related Web Resources:
Financial Services Institute Endorses FINRA as SRO for Investment Advisers, Financial Services, December 20, 2010

FINRA

Investment Advisers, Stockbroker Fraud Blog, December 9, 2010

Institutional Investors Securities Blog

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Posted In: FINRA , Investment Advisers

December 9, 2010

The “New” SEC is Acting Just Like The “Old” SEC by Protecting the Securities Industry from Responsibility for its Actions

The Securities and Exchange Commission has announced a proposal to temporarily extend a rule that facilitates certain proprietary trading by entities that are registered as both broker-dealers and investment advisers. The proposed extension would move Rule 206(3)-3T’s expiration date by two years, from December 31, 2010 to December 31, 2012. It would also would allow the SEC to complete a study mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Rule 206(3)-3T gives dually registered firms another way to satisfy consent and disclosure requirements that they would otherwise only be able to meet on a transaction-by-transaction basis. Having just the one option would limit the availability that non-discretionary advisory clients would have to certain securities.

The extension would give the SEC the time that it needs to study the regulatory issues related to dual registrants' principal trading. Dodd-Frank is requiring the SEC to look at any divergent regulations between investment advisers and brokers and use rulemaking to fix gaps so as to better protect investors. The agency has until January 21, 2011 to notify Congress of its findings.

Dodd-Frank’s Section 913 has generated a lot of debate because it could allow for most broker-dealers to be considered fiduciaries under the 1940 Investment Advisers Act. Right now, brokers don’t have to meet the fiduciary standard that investment advisers must satisfy even though both offer similar services. However, instead of holding brokers to the statutory fiduciary standard, the SEC might end up obligating them to fulfill various consent and disclosure requirements at the start of a retail relationship.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Securities Fraud Attorney William Shepherd thinks that it is time to hold brokers responsible to a fiduciary standard: “The only educational requirement to become a licensed securities broker is four months of on-the-job training and the passing of a half-day test. Yet, on average, securities brokers at major firms are paid more than doctors, lawyers and other professionals who must often attain seven or eight years of higher education. Many clients entrust securities brokers with their life savings, retirement assets, and their financial life blood. Why shouldn't these brokers and the firms required to supervise them be held responsible if the investors are ripped-off? Financial advisers perform the same function but have a fiduciary duty to investors, simply meaning they must put the client’s interest first when advising them. Why should securities brokers be held to a different standard and not be allowed to lull investors into trusting them, while selling their victims the highest commission products that they can find without regard to the client’s best interest? In fact, most state laws currently hold that when a broker is recommending securities to an unsophisticated investor, the broker has a fiduciary duty to that client. What the SEC is trying to do is to pass a rule that makes brokerage firms LESS RESPONSIBLE than they are at present. These endless tactics perpetrated by securities regulators, at the behest of Wall Street, and are yet another type of bail-out move by the Securities Cartel that controls this nation.”

Related Web Resources:
Read the Proposed Rule (PDF)

1940 Investment Advisers Act

Institutional Investor Securities Blog

Continue reading "The “New” SEC is Acting Just Like The “Old” SEC by Protecting the Securities Industry from Responsibility for its Actions " »

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Posted In: Broker-Dealers , Investment Advisers , SEC , SEC Enforcement

November 10, 2010

Investment Manager Accused of Securities Fraud Must Pay Defrauded Clients Over $20 Million

In a default judgment, The U.S. District Court for the Western District of Washington is mandating that investment adviser Enrique Villalba and affiliated entities pay investors over $20 million. The 47-year-old has been sentenced to almost 9 years in prison for defrauding clients of over $30 million.

Most of the funds that were taken from investors were lost in unauthorized, high risk investments in futures contracts. Villalba also used some of the funds to run Rico Latte coffee shops and purchase property. Among his victims was one woman who lost almost $12 million. Another man, former ER doctor David Ernst, lost his life savings. Tom Mulgrey, 56, lost $4 million.

Villalba has not been in touch with the plaintiffs of this securities fraud lawsuit since September 2009. His investment fraud victims are located in different US states. In their securities complaint, the plaintiffs are alleging claims under the Washington Securities Act and the 1934 Securities Exchange Act.

In granting the plaintiffs’ motion to obtain a default judgment, the court noted that per the two statutes, rescission is the way to calculate damages. In this case, the court deemed rescission appropriate because it “undoes the transactions” while returning the plaintiffs to their original state had they never invested their funds with the defendants.

Also, under the Washington Securities Act, the court determined that not only are the plaintiffs entitled to interest on the damages amount beginning the date of each deposit, but also they are entitled to recover lawyers’ fees and costs. The Washington Consumer Protection Act also entitles them to legal fees. Per the default judgment, the plaintiffs have been awarded $20,080,637.89, which includes the principal amount of $13,393,650.67, $6,669,053.22 in interest, and $17,934 in lawyers’ fees and costs.

Related Web Resources:
Court Orders Investment Manager To Pay Defrauded Clients Over $20 million, BNA/Alacrastore.com, November 5, 2010

Investment adviser caught in $30 million fraud sent to prison for almost 9 years, Cleveland.com, September 8, 2010

Read the Order

Securities Act of Washington

Continue reading "Investment Manager Accused of Securities Fraud Must Pay Defrauded Clients Over $20 Million " »

Posted by Shepherd Smith Edwards & Kantas LTD LLP | | Email This Post

Posted In: Investment Advisers , Securities Fraud

October 15, 2010

SEC Charges Investment Adviser With Allegedly Making Unsuitable Hedge Fund Recommendations to Elderly Clients

The Securities and Exchange Commission has charged investment adviser Neal Greenberg with securities fraud and breach of fiduciary duty related to the making of recommendations and marketing of hedge funds to investors. According to the SEC, Greenberg, who was the CEO of Tactical Allocation Services LLP and also the portfolio manager of Agile Group LLC, made unsuitable recommendations to clients, many of whom were elderly and/or retired or close to retirement, when he suggested that they invest in the hedge funds run by his firms.

The SEC contends that the investment adviser issued misstatements when he said that the hedge funds were suitable for older and conservative clients, many of whom were seeking low-risk investments that came with significant capital protection. For example, Greenberg allegedly “falsely stated that the Agile hedge funds” were low risk, highly diversified, and offered liquidity when in fact, the funds, which held approximately $174 million from over 100 clients, were non-diversified in their holdings and used leverage. Greenberg also is accused of claiming that the Agile funds “used leverage” in a manner that did not “significantly increase” their risk profile. Yet, says the SEC, for 2007 and 2008 the risk disclosures in private placement memoranda for the hedge funds from Agile contradicted the “false and misleading” misrepresentations made by Greenberg.

The SEC is also accusing Greenberg of failing to make sure that adequate compliance procedures and policies were put in place for determining whether certain investments were suitable for clients' specific needs. The commission says Greenberg failed to tell clients that they were going to have to pay management and performance fees on the leveraged part of their investments. Between 2003 and 2006, investors paid about $2 million in these undisclosed fees.

Related Web Resource:
Read the SEC Order Against Greenberg (PDF)

Continue reading "SEC Charges Investment Adviser With Allegedly Making Unsuitable Hedge Fund Recommendations to Elderly Clients" »

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Posted In: Investment Advisers , SEC Enforcement , Securities Fraud

October 12, 2010

Most Investors Want Fiduciary Standard for Investment Advisers and Broker-Dealers, Say Trade Groups to SEC

The North American Securities Administrators Association, the Consumer Federation of America, the Investment Adviser Association, the Financial Planning Association, AARP, and the National Association of Personal Financial Advisors have sent a letter to Securities and Exchange Commission Chairman Mary Schapiro asking that the agency examine a recent national survey that shows that the majority of investors don't know the differences between investment advisers, brokers, and financial planners. ORC/Infogroup conducted the survey for the trade groups.

1,319 investors were polled. Per the survey, investors appear to “overwhelmingly believe” that representatives who provide investment advice should disclose conflicts of interest and act in clients’ best interests. Many of them are wrong in their belief that investment advisers, broker-dealers, and insurance agents are currently held to a fiduciary standard.

Among the Survey’s Other Findings:
• More than three out of five investors are under the wrong impression that there is no difference between an investment adviser and a stockbroker.

• About 1/3rd of investors are not clear about the role that stockbrokers play or what services that they offer.

The group told Schapiro that per the survey’s findings, a common standard should apply to investment advice that is given, regardless of whether the recommendation is made by an investment adviser or a broker-dealer. They say that the “principles-based fiduciary duty that applies under the [1940 Investment] Advisers Act” should be the standard. Per the survey, many investors feel that a fiduciary standard should also apply to insurance agents that sell investments.

Related Web Resources:
Investment Adviser Association

SEC Chairman Mary L. Schapiro

North American Securities Administrators Association

The Consumer Federation of America

Financial Planning Association

AARP

National Association of Personal Financial Advisor

ORC/Infogroup

Continue reading "Most Investors Want Fiduciary Standard for Investment Advisers and Broker-Dealers, Say Trade Groups to SEC " »

Posted by Shepherd Smith Edwards & Kantas LTD LLP | | Email This Post

Posted In: Broker-Dealers , Investment Advisers

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