Archive for July, 2013

SEC Hits Two Dual Registrants (IA / BD) with Best Execution Violations

Wednesday, July 31st, 2013

The SEC has said that the practices of dual registrant investment adviser / broker-dealers were going to be an area of emphasis for them.  Two cases that were just settled show they mean what they said this time.  In the Matter of A.R. Schmeidler & Co., Inc. (ARS) and In the Matter of Goelzer Investment Management, Inc. and Gregory W. Goelzer (GIM) both involved dual registrants whose broker-dealers were primarily utilized to trade investment adviser client accounts.  Dual registrants and firms that allow registered representative affiliations with broker-dealers should ensure that clients are receiving best execution, and policies and procedures and disclosures are accurate.


In the ARS case, the firm began using a new clearing firm in 2005.  ARS received 80% of commissions on taxable accounts.  In 2007 the deal was renegotiated and ARS received 90% of such commissions.  The commission rate charged to clients was consistent at 6 cents per share regardless if the account was taxable or non-taxable.  It’s assumed that ARS did not receive any of the non-taxable commission due to ERISA requirements.

The SEC claimed that upon entering the new commission split arrangement, ARS did not conduct an analysis to determine whether the relationship resulted in best execution on behalf of clients.  The firm did have policies and procedures in place that dictated such a review be done, but it was not followed.  Therefore, the SEC claimed that ARS willfully violated the Investment Advisers Act (failure to conduct sufficient best execution analysis and failure to implement effective policies and procedures).

ARS agreed to fix its shortcomings, including hiring a consultant to review and confirm the practices, and pay at total of $1,011,565.45.  The payments include $757,876.88 in disgorgement, $78,688.57 in prejudgment interest, and a $175,000 civil penalty.

Of note, the SEC did not seem to take issue with the non-taxable accounts.  It appears that the SEC was questioning whether the renegotiated commission should have benefited clients rather than the firm.  We come to this conclusion, because if the SEC was concerned with overall best execution, then ARS should have also been reviewing the sufficiency of the 6 cents per share commission for non-taxable accounts as well. We would also question if the pro-ARS split and its further renegotiation was a way of indirectly compensating ARS for the non-taxable accounts, which could be an ERISA (DOL) violation.


The Goelzer facts were somewhat more commonplace.  In essence, GIM had standard ADV disclosures and policies and procedures that said they would seek best execution for clients.  It further included a statement that clients would get benefits for using GIM as broker-dealer, including access to block trading (which directed brokerage clients would not get access to).  None of this turned out to be accurate, however, as GIM did not review other firms’ execution or pricing.  GIM also didn’t do block trading.  Under GIM’s commission arrangement, block trading would have saved clients$309,994.

GIM agreed to hire a consultant similar to ARS, but GIM also agreed to provide notice to clients and prominently post a summary of the Order on its website.  The firm (and its CEO/CCO) also agreed to pay $498,793, made up of disgorgement of $309,994, prejudgment interest of $53,799, and a civil penalty of $100,000 assessed to GIM.  In addition, the GIM’s CEO and CCO, Gregory Goelzer agreed to pay a civil penalty of $35,000 for not properly implementing and enforcing effective policies and procedures.

This case was a bit more straightforward than the ARS case.  It is worth noting, however, that GIM was also cited for not properly disclosing its fee schedule or the negotiability of the schedule.  The firm had a set fee schedule, but 75% of the clients paid less than the stated amount.  Many firms engage in this same practice, assuming that clients aren’t harmed if they pay less than the schedule, but the SEC focuses on those clients that are paying the scheduled fee.  The SEC believes that these clients are harmed by the disclosure of an inflated schedule.  It does not appear, however, that this deficiency resulted in any additional fine.

Do you know our next superhero? Looking for a Sales Associate at MarketCounsel – Greater New York City Area #jobs

Monday, July 29th, 2013

We are seeking a capable Sales Associate to join our fast-growing, dynamic business and regulatory compliance consulting firm. The most qualified candidate has been told that they are a unique breed – demonstrating a strong ability for critical thinking and analytics, while also demonstrating excellent communication skills and an ability to manage ongoing projects with varying deadlines and priorities. We are looking for a demonstrated ability to work in a fast-paced, team-oriented and high energy environment with an emphasis on analytical thinking and communication.

See here for more details.

Brian Hamburger comments on BloombergBlack shutting down in @RIABiz

Friday, July 26th, 2013

BloombergBlack, the investment advisory arm of Bloomberg, will close down effective August 15 to both new and existing clients. “Bloomberg runs a disciplined business and has a well-known reputation for cutting its losses if a business unit is underperforming its projections,” says Brian Hamburger, chief executive of MarketCounsel. “This, however, seems like a very quick death by any measure. While I am unaware of their performance, I am speculative that there may have been some pressure from financial institutions as this new initiative gained more notoriety.”

Brian Hamburger quoted in @wealth_mgmt, “The Cost of Dodd-Frank”

Monday, July 22nd, 2013

“The biggest impact [of Dodd-Frank] is the introduction of a level of uncertainty into business planning,” says Brian Hamburger, MarketCounsel’s founder and managing director.  This uncertainty of the regulatory landscape has caused many advisors to over-compensate to be sure they stay on the right side of the line, despite not knowing where the line actually is. “We’ve been fighting a ghost,” he says.

Corey Kupfer Elected as President of Entrepreneurs’ Organization New York

Friday, July 19th, 2013

Entrepreneurs’ Organization (EO) New York has elected longtime champion of entrepreneurs, Corey Kupfer as its current president. Kupfer, Director of Entrepreneur Services at the Hamburger Law Firm and MarketCounsel has dedicated most of his waking hours to addressing the challenges of entrepreneurs through their pursuit of the dream. Starting as an entrepreneur himself at age 15 through the success of his own law firm, Kupfer became known by his clients as a strategist, negotiator and dealmaker. For more information, please see the press release.

More information can be found here.

FINRA Delays Discussion of Compensation Rule

Thursday, July 11th, 2013

According to an article in InvestmentNews, FINRA has backtracked from a notice on its website to consider its compensation disclosure rule at its July 11 meeting.  FINRA spokesperson Nancy Condon “said the organization’s board had pushed off consideration of the rule to a later date, due to tight scheduling.”

FINRA is proposing to require brokers to disclose to clients the compensation they received from a new firm.  MarketCounsel submitted a comment letter to FINRA pointing out serious flaws including: i) the harm that would be done to brokers due to the specificity requirement of the disclosure; and ii) the contradiction of requiring disclosure of compensation enticing a broker to join a new firm, while not requiring disclosure of compensation enticing the broker to stay at a firm.

The July 2013 #AdvisorSquawkBox hosted by Dan Bernstein and Brian Hamburger is now available

Thursday, July 11th, 2013

During this month’s Advisor Squawk Box our hosts Dan Bernstein and Brian Hamburger discussed the following trending topics:

  • MarketCounsel’s response to the SEC’s request for data and other information regarding harmonization;
  • FINRA posting a $10.5 million profit this past year;
  • Former CFP Board Chair gets sanctioned by the CFP Disciplinary & Ethics Commission; and
  • Former SEC Compliance Chief asks chairwoman White to stop suing compliance officers.

SEC Approves Narrowed Definition of “Public Arbitrator”

Thursday, July 11th, 2013

Effective July 1, 2013, the list of those persons who are disqualified from acting as “public arbitrators” in an investor-related FINRA arbitration proceeding has expanded. The SEC recently approved an amendment to the term “public arbitrator” (defined under Sections 12100(u) and 13100(u) of FINRA’s Customer and Industry Codes of Arbitration Procedure) that will ultimately exclude more individuals with industry-related experience from the selection pool available to those parties participating in a FINRA arbitration.

The new definition disqualifies persons associated with a mutual fund or hedge fund from public arbitrator eligibility. Additionally, all those engaged in a disqualifying activity will now be subject to a two year waiting period after ceasing that activity to become eligible again.  This will most likely lead to brokerage firms defending themselves and their registered representatives having a more difficult job defending themselves when facing an all-public panel of arbitrators.

SEC Adopts Certain JOBS Act Rules

Wednesday, July 10th, 2013

The SEC voted today to adopt certain rule changes and propose additional rules regarding private placements pursuant to the JOBS Act.  The SEC was mandated to make the changes upon the JOBS Act becoming law.  The law was passed in April of 2012 and the SEC was supposed to have completed its rule making by July of 2012.  The SEC took actions to allow general solicitation and advertising by private placement issuers, stop “bad actors” from being involved in private placements, and proposed a new rule that would give more insight in to private placements.

General Solicitation and Advertising: The SEC eliminated the prohibition against general solicitation and advertising for issuers of private securities under Rule 506 and Rule 144A.  The Rule 506 elimination is subject to the following:

  • Only accredited investors can purchase Rule 506 securities offered pursuant to a general solicitation.
  • The issuer must take reasonable steps to verify each purchaser’s accredited status.

In the past, issuers often determined accredited status by simply asking the purchaser.  The new rule requires the issuer to consider the facts and circumstances of each purchaser and the transaction. The final rule provides a non-exclusive list of methods that issuers may use to satisfy the verification requirement, including:

  • Reviewing copies of any IRS form that reports the income of the purchaser and obtaining a written representation that the purchaser will likely continue to earn the necessary income in the current year.
  • Receiving a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that such entity or person has taken reasonable steps to verify the purchaser’s accredited status.

144A was amended to allow securities sold pursuant to Rule 144A to be offered to persons other than Qualified Institutional Buyers (“QIBs”), including by means of general solicitation, provided that securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe is a QIB.

Bad Actors: The SEC adopted a rule that disqualifies felons and other “bad actors” from participating in Rule 506 (private placement) offerings.  The rule was softened compared to the proposed version.  Some highlights of the bad actor rule are:

  • The rule only applies to those that are disqualified in the future. A bad actor will only be disqualified if the event that triggers disqualification occurs after the effective date of the rule.
  • The proposed rule disqualified any officer of the issuer or any officer of a person paid to solicit investors.  The final rule, however, covers only executive officers of such entities and officers who participate in the offering.
  • The proposed rule applied the triggers to any beneficial owner of 10% or more of any class of the issuer’s securities.  The final rule, however, covers only beneficial owners of securities representing 20% or more of the issuer’s total voting power.

Private Placement Monitoring:  The SEC voted to propose an additional rule that would increase Regulation D requirements in order to improve the Commission’s ability to evaluate changes in the private placement market. The measures being proposed in this rule include:

  • Expanding the information that issuers must include on Form D so that the Commission has more information about the issuers and the offerings in this market.
  • Requiring issuers to file the Form D before the general solicitation begins, so that the Commission has timely information about issuers that attempt to use Rule 506.
  • Requiring issuers to file a Form D when an offering is completed, so that the Commission is provided with a more complete picture of the offerings that are conducted in this market.
  • Putting in place an effective mechanism for enforcing compliance with Form D filing requirements.
  • Requiring legends in general solicitation materials that would inform potential investors of risks as well as the statutory mandate that sales are limited to accredited investors.
  • Requiring, on a temporary basis, that issuers submit their written general solicitation materials to the SEC so the Commission can monitor solicitation practices.

Commissioners Troy Paredes and Daniel Gallagher do not support the proposed rule.  They feel that the rule would be overly burdensome on issuers and not in line with the JOBS Act’s mandate.  Commissioner Gallagher, in particular, was very harsh in his dissent.

The final rules are effective 60 days after being published in the Federal Register (which generally takes a few days).  The comment period for the proposal is also open for 60 days after being published in the Federal Register.  These rule changes certainly impact issuers of private placements, including hedge funds, as they will have the ability to reach more potential investors.  Other advisers, however, should also be ready for these changes.  Clients will be seeing a lot more information about private placements, and will certainly ask their advisers about getting access to these investments.  Advisers should be ready for these questions.

MarketCounsel Responds to SEC Harmonization Request

Monday, July 8th, 2013

MarketCounsel has submitted a comment letter in response to the SEC’s request for data and other information regarding the duties of brokers, dealers, and investment advisers.  The SEC’s request primarily focused on quantitative data regarding how much it would cost clients and brokerage firms should the fiduciary duty be extended to broker-dealers. The request also discussed “harmonizing” broker-dealer and investment adviser rules.  The SEC went so far as asking if they should consider one set of rules for both industries.

MarketCounsel has been wary of “harmonization” for quite some time.  We believe that the SEC’s view of harmonization would result in a big hit to investment advisers including the loss of a key marketing advantage in being a fiduciary, more onerous rules, and the eventual requirement to join a self-regulatory organization (most likely FINRA).  We will continue to protect the interests of independent investment advisers from attack by regulators, Congress and the big lobbying dollars of wirehouses and mutual funds.

MarketCounsel’s comment letter will be listed with other submissions on the SEC’s website, but can immediately be found on RIABiz at