Archive for November, 2012

Chairman Schapiro to Step Down

Monday, November 26th, 2012

In an announcement that surprised no one, the SEC published release stating that Chairman Mary Schapiro will step down on December 14, 2012.

The announcement came shortly before President Barack Obama said he was appointing Elisse Walter, a current SEC Commissioner, as chairman.  Similar to Ms. Schapiro, Ms. Walter has FINRA ties and has been a proponent of requiring an SRO for investment advisers.

ENTREPRENEURS’ ORGANIZATION OF NEW YORK TOWN HALL – How to Persevere as an Entrepreneur Impacted by Super Storm Sandy

Friday, November 23rd, 2012

If you know of our clients or any other business-owners impacted by the storm, please invite them as my guest to this EO event Tuesday evening. #sandy #eo

Two more advisers in SEC hot water for misrepresentations and unresponsiveness

Tuesday, November 20th, 2012

The SEC announced that it sanctioned two investment advisers for examinations conducted by SEC staff.  Evens Barthelmy and his firm “misled the SEC examiners by inflating the firm’s claimed AUM ten-fold in an apparent attempt to show that the firm was eligible for SEC registration.  Mr. Barthelmy moved the decimal points on his client custodian statements to make it appear that he had $26.28 million in AUM rather than $2.628 million.

Another SEC investigation found that Seth Richard Freeman and his advisory firm EM Capital, delayed 18 months in producing books and records for the SEC.  EM Capital repeatedly promised to provide records to the SEC including financial statements, e-mails and documents related to their management of a mutual fund, but only provided the materials after learning the SEC staff was considering enforcement action.

SEC Cracks Down on Investment Advisers

Thursday, November 15th, 2012

InvestmentNews reported earlier this week that the SEC has been progressively and increasingly cracking down on investment advisers with compliance deficiencies, as evidenced by the Commission bringing a record number of enforcement actions in 2012.

The SEC announced that it pursued 147 enforcement actions against advisers and investment companies and 134 actions against brokers. The SEC noted victories against UBS Financial of Puerto Rico for a disclosure violation relating to certain mutual funds, settling for $26 million, and OppenheimerFund for misleading investors as to worsening conditions of a fund, settled for $35 million.

The SEC credits increased enforcement activities on Commission restructuring. This reorganization, aimed at vigorous investor protection, came to fruition amidst an environment of criticism targeting the SEC for not pursuing Wall Street executives allegedly responsible for the 2008 financial crisis. In response the SEC announced the filing of 29 actions in which 24 CEOs, CFOs, and other senior corporate officers are named in connection with wrongdoing contributable to the financial crisis.

As the bulk of cases brought against investment advisers focus on egregious violations of the Investment Advisers Act of 1940–violations previously cited in SEC deficiency letters–advisers should be cautious in responding to these deficiencies and proactive in enacting compliance solutions that are tailored to their business model.

SEC Chairman Schapiro, with one foot out of the door, begins to craft her legacy

Thursday, November 1st, 2012

Investment News reports that it is commonly assumed Chairman Schapiro will step down after the upcoming election regardless of which party takes control of the White House.  As she prepares to leave, Ms. Schapiro has begun to shape the narrative of her tenure.  In a recent appearance she accounted that, appointed amidst economic crisis and under threat of abolishing the SEC, she helped to raise the profile of the Commission.  And indeed she has had success with regards to the budget, securing regular increases in funding for the Commission.  She also touts her success in streamlining and restructuring the enforcement division, upgrading technology, establishing a risk and economic analysis division, improving inter-agency communication and collaboration, and bringing an increasing number of enforcement actions.  While facing recent setbacks in failing to secure money-market-fund reform and failing to impose a fiduciary duty for those giving retail investment advice, Ms. Schapiro takes pride in the increased oversight of hedge funds and private equity funds.

Although there is no direct impact on advisers, this perhaps signals a renewed effort by Ms. Schapiro to push through reforms and inculcate an ethos of stricter regulatory enforcement prior to her departure.

FINRA opens arb system to RIAs

Thursday, November 1st, 2012

Investment News reported today that FINRA has opened up its arbitration system to registered investment advisers.  Until now, FINRA arbitration has been used in investor or industry complaints involving securities firms and broker-dealers. RIAs now can use the system, according to Linda Feinberg, president of FINRA’s office of dispute resolution.  FINRA will formally announce the program soon and that a few arbitration cases involving investment advisers are already in the authority’s system.  However, all parties to the arbitration would have to agree to use FINRA.

The move to include RIAs in FINRA arbitration is in no way related to FINRA’s effort to become the self-regulatory organization overseeing investment advisers, according to Ms. Feinberg.“We’re doing it because we had a lot of requests from attorneys,” she said.  According to FINRA’s published statistics, new case filings were down 8% through the first nine months of 2011. MarketCounsel questions FINRA’s stated motives and believes that the expansion serves two purposes: i) the generation of  additional revenue at a time when FINRA revenue has been decreasing, and ii) more ammunition for FINRA to say they should be that adviser SRO by claiming that they are already involved in the industry.

Merrill Lynch Slammed with $1.33 Million Verdict Over Fannie Mae Preferred Stock

Thursday, November 1st, 2012

A unanimous FINRA arbitration panel recently awarded two former Merrill Lynch clients $1.33 million for losses tied to the sale of certain shares of Fannie Mae preferred stock.  The former customers alleged that Merrill Lynch solicited the purchase of these securities in 2008, just before the U.S. Government placed Fannie Mae in conservatorship and stopped all preferred dividend payouts to buyers of the preferred stock.  The arbitration award is also significant due to the fact that the arbitration panel made a finding that “Respondent [Merrill Lynch] is found liable for breach of fiduciary duty.”  The case centered around the former clients’ allegations, among other things, that Merrill Lynch had recommended the purchase of Fannie Mae preferred shares as a “safe” investment, that the “U.S. Government ‘stands behind’ Fannie Mae” and that there would be no commission charged on the purchase.

SEC Targeting the Top in Broker and Advisory Firm Reviews

Thursday, November 1st, 2012

According to Carlo di Florio, Director of the Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”), the SEC is taking a hard look at senior management at brokerage and advisory firms to gauge “the tone at the top.”

Specifically, Mr. di Florio stated “the SEC wants to know that enough resources have been allocated to compliance functions.”  Mr. di Florio continued by stating “we’ve begun to monitor head count and want to understand why [attrition among risk managers] is happening.  Head counts are key indicators.  If we see them go down while business is heating up in certain ways, that means a firm is cutting in the wrong way.”

In addition, Mr. di Florio stated “members of the SEC’s exam and enforcement staffs are now working side by side to identify problems and bring cases.  The way we used to do exams was [to] write them up, then throw it over the fence to enforcement.  They were two distinct processes… Now enforcement and exam personnel are ‘locking arms’ in developing cases,” he said.

Finally, commenting on the matter, John Walsh, a partner a Sutherland Asbill & Brennan LLP, and a former official in the OCIE, said this is a fairly new development.  Specifically, Mr. Walsh said “the creation of the asset management unit is a fundamental change in the way the SEC functions.”  The SEC has a “fairly substantial team of attorneys that focuses on [asset management] issues. … It really does make a difference if people on the enforcement side understand the space, and understand the regulatory regime.”