Archive for November, 2013

Adviser Charged with Violations Involving Principal Transactions and Custody Practices

Friday, November 29th, 2013

The SEC recently announced charges against two advisory firms and certain of their executives for violations involving improper principal transactions and custody practices according to InvestmentNews. 

Specifically, the SEC stated that Parallax Investments and Tri-Star Advisors engaged in thousands of improper principal transactions between advisory client accounts and their affiliated brokerage firms, without obtaining client consent or making required disclosures.  As a result, the SEC believes that Parallax and Tri-Star deprived clients of knowing in advance that their advisers stood to benefit by running the trades through an affiliated account.  The owner and two representatives used the firm’s corporate accounts to purchase mortgage-backed securities and then transferred the bonds to their clients’ accounts, all the while collecting incentive fees totaling more than $2M on the transactions. 

In addition, Parallax was charged with violations of the custody rule for failing to obtain a proper fund audit and deliver timely financial statements to investors in a private fund for which they acted as the adviser.  Although Parallax obtained an audit of the fund in 2010, the SEC alleged that the firm knowingly failed to retain a PCAOB-registered auditor and failed to deliver the financial statements on time.  Moreover, the SEC charged the firm with failing to adopt policies and procedures designed to prevent violations of the Investment Advisers Act of 1940 as well as failing to conduct an annual review of same.  It is difficult to tell based on the available information whether these separate charges would have been brought alone if there had not been allegations of wrongdoing related to the principal transactions as well. 

This case comes on the heels of several others brought under the chairmanship of Mary Jo White.  However, it is still too early to tell whether we will see the SEC’s recent enforcement zeal wax or wane as we move into the new year. 

A link to the SEC order can be found at:

Investor Advisor Panel Pushes SEC on Fiduciary Harmonization and User Fees

Monday, November 25th, 2013

The Investor Advisory Committee met on Friday November 22 and approved two recommendations from the Investor as Purchaser subcommittee. The Committee was created by the Dodd-Frank Act to represent the interests of small investors.  It is made up of 21 members, including financial industry officials, academics, consumer advocates and state regulators.  The SEC is not bound by any recommendations of the Committee, but it must promptly issue a public statement disclosing actions it intends to take regarding recommendations.

Harmonization of Fiduciary Duty

The recommendation to expand the fiduciary duty to broker-dealers providing individualized investment advice, was approved quickly and easily by the Committee.  The first option preferred by the subcommittee is one favored by MarketCounsel, which is to limit the exclusion from registration as an investment adviser.  Make broker-dealers providing investment advice on more than just a transaction-by-transaction basis, register as investment advisers.  The idea is simple and would not need much regulatory intervention because the regulations are already in place.  This also recognizes that broker-dealers and investment advisers both provide valuable services that should remain separate, but available.

If the SEC chooses not to more narrowly interpret the broker-dealer exemption of the Investment Advisers Act, the Committee recommends that the SEC incorporate an enforceable, principles-based obligation to act in the best interest of the customer.  In addition, the SEC should “examine and, where appropriate, promulgate rules prohibiting or restricting certain sales practices, conflicts of interest, and compensation schemes.”

Finally, the subcommittee recommended that the SEC require a uniform, plain English disclosure document to be provided to customers of broker-dealers and investment advisers that covers basic information about the nature of services offered, fees and compensation, conflicts of interest, and disciplinary record.  The subcommittee said that the current Form ADV would be a good starting point.

User Fees for Advisor Examinations

In addition, the committee supported assessing user fees to help boost advisor examinations.  While the Committee supported assessing user fees, ThinkAdvisor reported that the members voiced concern with how the user fees would be assessed and whether the cost would just trickle down to investors.

The recommendation is based upon the Dodd Frank mandate to improve investment adviser examinations.  The SEC recommended legislation to either: i) assess user fees to be used for examinations, ii) require advisers join a self-regulatory organization (SRO), or iii) give SROs (FINRA) the ability to examine their dual registrants.  The subcommittee specifically noted support among industry groups to the user fee bill introduced by Rep. Maxine Waters (D-CA).  Barbara Roper, chair of the subcommittee and director of investor protection at the Consumer Federation of America, said that the subcommittee “supports any number of different ways to solve this problem, [but] this user-fees [legislation] seems like the most doable of the options.”

MarketCounsel has expressed concern with this thought process.  It seems like industry participants have bought in to the user fee solution because they feel it is better than an SRO.  While that is undoubtedly true, we should not be so fast to agree with legislation that will cost advisers more money with no benefits.  Why are advisers paying for their examinations, while broker-dealers, investment companies and other financial institutions under SEC jurisdiction are not?  Who is going to make sure that the SEC is not overextending its blank check that it would be given by this legislation?  We will continue to question the cost vs. the benefit to advisers and the investing public regarding these recommendations.


Listen to #AdviserSquawkBox for November 2013… Out Now!

Thursday, November 14th, 2013

The MarketCounsel Adviser Squawk Box is a monthly podcast program providing a “seat in the office” as MarketCounsel’s own Brian Hamburger and Dan Bernstein review the past month’s most pertinent developments affecting investment advisers.  During this month’s program, Dan and Brian discuss:

  • The CFP Board’s Continued Focus on Compensation Definitions;
  • FINRA’s Recruitment Compensation Rule Moving Forward;
  • The SEC’s Sanctions Against Advisers for Repeat Violations; and
  • Increased Pressure on Broker Protocol Departures.

Morgan Stanley Sues Adviser Over Stack of Wrong Phone Numbers

Thursday, November 14th, 2013

In the latest of a string of publicized cases involving breach of the Protocol for Broker Recruiting, MSSB recently commenced action against Denis O’Brien. O’Brien, a nine year veteran of the firm’s Mystic, Connecticut branch, resigned on October 25th to join Raymond James, another member of the Protocol.

Ordinarily, O’Brien could have taken with him a list of limited information about the clients that he serviced while at MSSB, and freely solicited them to follow him to Raymond James. However, MSSB advisers attempting to solicit and retain O’Brien’s clients for the firm quickly realized they were dialing wrong number after wrong number. According to MSSB, their IT team has determined that O’Brien had changed 206 phone numbers, for 156 accounts, the day before his resignation, many times by just a single digit.

MSSB has sought, among other things, an order compelling O’Brien to return the list of (correct) phone numbers that it says he took with him, and destroy any extra copies he might want to keep for himself. O’Brien’s legal battle with MSSB likely could have been completely avoided with a more carefully planned exit strategy.

Brian Hamburger shares his perspective on advisers evolving with technology @newsfromIN

Monday, November 4th, 2013

InvestmentNews analyzes the changing role of financial advisers over the next decade due to advances in technology. Static documents such as the prepared financial plan will be replaced by interactive financial planning software. Brian Hamburger recognizes and offers advice for advisers on these inevitable changes:

“Those advisers who cherish the concept of sitting around a kitchen table each quarter talking about asset allocation are going to find themselves diminishing in utility over time,” said Brian Hamburger, founder of MarketCounsel. “The adviser’s ability to embrace technology that increases the level of engagement with the client is going to rule the day.”

Click here to read more.

Brian Hamburger talks broker recruiting bonuses with @FAmagazine

Monday, November 4th, 2013

Financial Advisor Magazine reports that the “truces” regarding recruiting bonuses at wirehouses are not going anywhere fast. However, the proposal that FINRA will be imminently filing with the SEC, requiring the disclosure of recruitment compensation packages to clients leaves some uneasy. Brian Hamburger offers his thoughts in “Big Signing Bonuses For Top Brokers Are here To Stay:”

The big firms certainly hope disclosure will cut the cost of recruiting, said Brian Hamburger, founder of MarketCounsel LLC.  “But it won’t last,” he said. “It’s like airfares — once one firm makes a change the others will just have to follow.”

Click here to read more.

Brian Hamburger on the SEC’s 2014 examination plans @newsfromIN

Friday, November 1st, 2013

Andrew Bowden, director of the SEC’s Office of Compliance Inspections, stated yesterday that they plan to zero in on about half of the firms that have never gone through an examination in 2014. In InvestmentNews’ “SEC to take ‘swipe’ at RIAs that have never been examined,” Brian Hamburger is skeptical of these big plans:

“Next year I’m going to lose 40 pounds, too,” said Brian S. Hamburger, president and chief executive officer of MarketCounsel, a regulatory consulting firm. “It’s aspirational.”

Mr. Hamburger said it is an open question whether Mr. Bowden’s office has the proper management and resources to fulfill its ambition, given that the office also devotes considerable resources to examining broker-dealers, who are also regulated by the Financial Industry Regulatory Authority Inc.

Click here to read more.