Archive for January, 2013

SEC Files Insider Trading Suit Against Florida Broker

Thursday, January 31st, 2013

Last week, the SEC filed suit against a securities broker in New Jersey Federal Court for alleged securities violations.  The broker came across material, non-public information regarding the auction sale of Pharmasset Inc., an NJ pharmaceutical company, to Gilead Sciences.  The information was disclosed to him by a Portfolio Manager of the brokerage firm whose customer-client, a board member of Pharmasset Inc., informed him of the pending sale.  The broker was instructed by the Portfolio Manager, in accordance with the firm’s policies and procedures, that he would be prohibited from recommending or trading Pharmasset securities based on this material, non-public information.  The broker had been trained and went through the firm’s verification process regarding these policies and procedures.

Prior to the announcement of the sale, the broker offered the inside information to two outside penny stock promoters.  Using the information, these individuals profited a combined total of $708,327 after the sale of Pharmasset, Inc. was made public.  The SEC claims that the broker was subsequently given a $35,000 cashier’s check and private jet-ski dock for providing them with this information.  A Criminal suit has also been filed by the US Attorney’s Office for the District of New Jersey.

Of particular note in this case is that the brokerage firm has not been named in either suit and for now appears to have avoided any liability for their registered representative’s alleged actions.  In fact, the name of the firm is not even mentioned in the underlying case, but instead just generally calls it a brokerage firm.  From our research into the broker, it appears that he was with Morgan Stanley.  The lack of Morgan Stanley’s culpability is evidence that following your firm’s policies and procedures can be a defense to a rogue representative’s actions.

George Canellos Named Acting Director of Enforcement

Thursday, January 31st, 2013

The Securities and Exchange Commission today announced that George S. Canellos, currently Deputy Director of the Division of Enforcement, has been named Acting Director.  The appointment is effective February 8.

Mr. Canellos, has been the division’s Deputy Director since June 2012.  He previously served as Director of the SEC’s New York Regional Office from July 2009 to June 2012.  Mr. Cannellos is also a  former federal prosecutor, holding the position of Assistant U.S. Attorney in the Southern District of New York for nine years.

FINRA industry arbitrators still play a significant role

Thursday, January 31st, 2013

Early in 2011, investors pursuing FINRA arbitration before panels consisting of three arbitrators were given the option to choose an all-public arbitration panel.  Investors with claims of more than $100,000 may choose between two panel compositions: either (1) a panel involving at least one industry arbitrator or (2) an all-public panel.  According to InvestmentNews, more than three-quarters of investors initially went for the all-public option, spawning speculation that industry arbitrators would soon become a thing of the past.

Despite this portent of all-public panels, the trends show that industry arbitrators continue to play a significant role.  Of the claimants that chose the all-public option, more than half ended up with an industry arbitrator.  Further, and most significantly, win rates with all public panels do not appear to be much higher than in cases with an industry arbitrator–according to FINRA, 49% versus 45% as reported by InvestmentNews.

Claimants’ attorneys continue to push for relaxed educational requirements and a simplified application process.  While FINRA, last week, proposed a rule change to tighten up the definition of public arbitrator to exclude people associated with a mutual or hedge fund and to require those who have been industry-affiliated to wait two years before being classified as public.

The SEC continues to crack down on advisers miscalculating RAUM

Tuesday, January 29th, 2013

In what has become a common refrain, advisers are warned to take care in their calculation of Regulatory Assets Under Management. Earlier this week, Brian Hamburger was quoted in InvestmentNews discussing some of the pressures and issues advisers face in making these determinations. Advisers with a fiscal year ending in December will have to calculate RAUM for their annual ADV updates in the coming weeks. Advisers should be careful not to inflate those numbers and to properly demarcate those assets that fall within the revised definition.

SEC appears to be poised for action despite split Commissioners

Tuesday, January 29th, 2013

Elisse Walter, taking over from former SEC Chairman Mary Schapiro, has begun her tenure by demonstrating her ability to find common ground among a politically divided Commission. Ms. Walter has made a concerted effort to take in all perspectives before setting an agenda for what could be an ambitious year. Daniel Gallagher, one of two Republican commissioners recently stated, “she’s been tremendous on outreach, getting all our input. She’s very consensus-oriented. I do think it’s going to be a productive year. The personalities are right.” In addressing the January 18 meeting of the Investor Advisory Committee, Ms. Walter asserted that forecasts of Commission gridlock are overblown.

President Obama has since nominated Mary Jo White to run the SEC so it remains to see if this comradery continues.

President Obama to nominate Mary Jo White to lead the SEC

Thursday, January 24th, 2013

CNBC and the Associated Press are reporting that that President Barack Obama will nominate Mary Jo White to lead the Securities and Exchange Commission.  Ms. White is a former Manhattan U.S. Attorney with broad experience in prosecuting white-collar crimes.

A White House official confirmed to CNBC and The Associated Press the president would announce White’s nomination during a ceremony in the State Dining Room Thursday at 2:30 p.m.

The official spoke on the condition of anonymity in order to discuss the nominations ahead of the president.

According to NBC News, Ms. White spent nearly a decade as the U.S. attorney in Manhattan and has a reputation as a tough prosecutor with an expertise in pursuing white collar crimes and complex securities and financial fraud cases.  White has experience defending high profile bankers as well.

Broker-Dealer AML No-Action Extended

Monday, January 21st, 2013

The no-action letter that allows broker-dealers to rely upon the anti-money laundering policies and procedures of investment advisers has been extended by the SEC.

In 2004, the Treasury Department was considering extending the USA PATRIOT Act’s (the “Act”) anti-money laundering requirements regarding customer identification to investment advisers.  Broker-dealers were already required to meet those regulations.  The Act allows firms to rely upon the identification procedures of other firms that are subject to the Act.

In 2004, broker-dealers, through SIFMA, asked the SEC to allow them to rely upon certain investment advisers’ identification procedures. The no-action request was granted for a period of one year.  Each year since then SIFMA has asked for the no-action relief to be extended, despite the Treasury Department withdrawing a rule proposal that would make investment advisers subject to the Act’s requirements.  The SEC has recently extended the relief to January 11, 2015.

The no-action relief allows broker-dealers to rely on investment advisers as if they were subject to the Act if:

  • the broker-dealer’s reliance on the investment adviser to conduct customer identification is reasonable and due diligence is conducted;
  • the investment adviser is SEC registered; and
  • the investment adviser agrees in writing to: (i) implement a proper AML program; (ii) perform the required customer identification; (iii) disclose any suspicious or unusual activity to the broker-dealer; (iv) certify annually that its representations remain accurate; and (v) comply with requests to review its customer identification books and records.

This is important to investment advisers because, while they are not subject to the Act’s customer identification requirements, they may be expected to contractually agree to such.  Investment advisers should be aware of what they are being asked to do and be ready to abide by the Act or have such language removed from any contract.

SEC Enforcement Director Robert Khuzami to Leave

Wednesday, January 9th, 2013

The SEC announced the Enforcement Director Robert Khuzami will be leaving after nearly four years at the SEC.  The release went on to laud Mr. Khuzami’s many triumphs.  His departure continues a trend of high ranking SEC Staff leaving the agency.

Financial Advisors Involved in 401(k) Planning Can Get New Credential

Tuesday, January 8th, 2013

As reported by Financial Advisor Magazine, UCLA and The Retirement Advisor University have partnered to develop a professional designation for advisors specializing in defined contribution retirement plans.  The curriculum consists of 50 courses, a proctored examination, a written case study and three days of classroom training at the UCLA Anderson School of Management in Los Angeles.  Eligible advisors must manage a minimum of 10 D.C. plans with $30 million in plan assets and have at least three years of qualifying experience.  The number of advisors allowed to enroll is to be limited to 1,000 people between now and 2016, and three courses of 65 people each for 2013 have almost been filled, according to Fred Barstein, founder of The Retirement Advisor University.

Moneyball for recruiting financial advisers? It exists

Tuesday, January 8th, 2013

According to a recent InvestmentNews report, data offer insight into future production of possible signings; what’s the OBP?

Just as Billy Beane, general manager of the Oakland Athletics baseball club and subject of the best-selling book ‘Moneyball,’ relies on statistics when making his decisions about players, brokerages can use data to make informed decisions about recruitment, claims Patrick Kennedy.

Mr. Kennedy is co-founder and vice president of product and client services at PriceMetrix Inc., which provides practice management software for financial advisers and aggregates data from more than 35,000 advisers managing about $3.5 trillion in investment assets for more than 6 million clients. The data yields a lot of useful information about optimal practice management strategies, and can assist firms in making recruitment decisions.

According toPriceMetrix, the four most reliable predictors are:

  1. Experience:  an adviser who gets to a given level of production in five years is a better prospect than one who took 20 years to get to that same level
  2. Form of adviser production (fee or commission): Fee-based is better.  Clients with fee-based accounts tend to have longer tenure than those who pay on a commission basis.
  3. Nature of advisers’ book of business (large vs. small clients): The data shows that wirehouses are also right about focusing on larger clients. An adviser can expect to see an annual bump-up in revenue of $1,650 for every client who has more than $250,000 in investible household assets. For every client with less than that amount, however, future revenue is expected to decrease by $270. What’s more, small clients distract advisers from their more important clients. “The more small clients an adviser has,” Mr. Kennedy noted, “the lower the retention rate of large clients they have.”
  4. Depth of relationships with clients: As measured by the average number of accounts per household, is another strong predictor of future success. Those advisers with a greater number of accounts per household tend to make more money from the relationship and also retain the clients for longer periods.

The assessment of these four key factors could help managers and advisory firms get more bang for their buck when it comes to recruiting new advisers, said Mr. Kennedy. “The progressive firms are already playing Moneyball,” he said. “And others have to catch up.”