Archive for May, 2014

@BillWinterberg Highlights Brian Hamburger’s Cybersecurity Breach Observations

Friday, May 30th, 2014

In FPPad Bits and Bytes for May 30, Bill Winterberg talks about Brian’s recent Wall Street Journal column:

Next up is a timely article on poor cybersecurity practices among financial advisors. In a Wall Street Journal column, Brian Hamburger, compliance attorney and chief executive of MarketCounsel, identified several dangerous issues he’s seen when visiting advisory firms.  The innocent, but dangerous, practices include things like writing down passwords on sticky notes, failing to reset passwords when an employee leaves the firm, and not encrypting laptop hard drives.  Couple that with the dramatic increase in client spoofing, where hackers break in to client email accounts to request fraudulent money transfers, and you have a recipe for some substantial financial losses as well as the loss of client trust.  Regarding passwords, my advice is to treat them like a pair of boxer shorts. Yes, boxer shorts: Keep them a mystery, don’t share them, don’t leave them lying around, and please, change them often!

Read more.

SEC Wins Another Against a Small Adviser and Brian Hamburger Has Something to Say About It @finplan @Ann_Marsh

Friday, May 30th, 2014

In what appears at first to be a GIPS compliance and advertising case, the SEC wins a case against a small investment adviser, slapping them with nearly $1 million in fines and securing a lifetime ban of its principal.  But everything is not what it seems.  The case is fraught with recidivist behavior, hindering an SEC examination by suppressing documents, and failing to heed the incessant warnings of their service provider.  It’s also a case illustrating that the SEC continues to pursue their strongest actions against small investment advisers.

While the ALJ did not find that the behavior harmed investors, he did find that respondents acted willfully deceitfully on an issue that Zavanelli had previously been cited for.  He was found to have ordered his staff to suppress responsive documents to SEC requests and generally been uncooperative.  If you only read the summary, the fine would seem steep.  But there appears to be a confluence of issues that led to this decision.  Primarily, the firm was found to have engaged in recidivist behavior and have hindered the SEC’s examination.  The SEC has shown a waning tolerance for such repeat violations, especially when the behavior seems purposeful and the control person is so unapologetic.  At the same time, the SEC has continued its campaign of putting so many resources up against those advisers least equipped to mount a significant defense.

Securities lawyer Brian Hamburger, who was not involved in the case, said the judge appears to have taken an unusually hard line in part over Zavanelli’s unapologetic attitude toward the investigation.  Zavanelli “was found to have ordered his staff to suppress responsive documents to SEC requests and that they had generally been uncooperative,” Hamburger says. “Even considering all of the findings, however, it seems that Zavanelli is paying an exorbitant price for his actions; that is the price of his life’s work. And all without any findings that his behavior harmed investors.”

Read more.

DOL Fiduciary Proposal Delayed… Again

Wednesday, May 28th, 2014

InvestmentNews reported that the Department of Labor updated its regulatory calendar on Tuesday to move its fiduciary rule proposal from August to January 2015.  The rule was first proposed in 2010.

Industry experts on all sides seem pleased with the delay, showing that none are particularly satisfied with the current content of the proposal.  Most feel that the extra time will allow the DOL to fine tune the proposal based on industry feedback.  While Barbara Roper of the Consumer Federation of America agrees, she expressed concern saying, “It is more important to get the rule right than to get it done fast… On the other hand, getting it done is important.”

Corey Kupfer on the Biggest Mistakes in Succession Planning @BrightTALK

Friday, May 23rd, 2014

Head of Entrepreneurial Services says start early, have a realistic view of your value and be willing to relinquish control.  Watch it here.

Chairman White and Ex-Chairman Pitt Discuss Independent Examinations of Advisers

Friday, May 23rd, 2014

InvestmentNews and ThinkAdvisor both reported from the Investment Company Institute’s annual conference this week.  During questions from reporters, SEC Chairman Mary Jo White indicated that she is open to the idea recently mentioned by Commissioner Daniel Gallagher to allow independent third parties to conduct examinations of investment advisers.  Although this idea has been floating around for over a decade, Chairman White called the idea “creative.”  Chairman White said that “there are a number of issues that have to be carefully looked at, including authority issues,” but that the SEC does have the ability to implement the idea.

ThinkAdvisor also reported on comments from ex-SEC Chairman Harvey Pitt (2001-2003) who noted that he first proposed this idea back in 2003 when the compliance program rule was being considered.  Mr. Pitt is a proponent of the independent examinations and agrees that the SEC has the authority to enact rules requiring the examinations.  He also feels that the SEC can shortcut the rule making process by exempting advisers from certain parts of the Advisers Act if they voluntarily go with independent examinations.  He believe that this can be done without formal rule making.

Pitt goes into more detail than Commissioner Gallagher did in stating that he believes that the independent examinations should be annually and should be for any firm that “takes money from the public for investment purposes.”

All the Cybersecurity in the World Can’t Protect You From Dad @nytimes

Thursday, May 22nd, 2014

I’m admittedly a technology geek and sucker for the cutting edge but couldn’t wrap my head around the SEC’s new focus on “cybersecurity.”  I mean, the term itself harkens images of RoboCop.  But, alas, the New York Times reminds me that we all have dads.  Read more.

Brian Hamburger and Rick Ketchum Both Welcome Alternate Plan for Advisor Oversight @finplan

Wednesday, May 21st, 2014

MarketCounsel and FINRA are not often aligned in their regulatory agenda.  But this week, at the FINRA annual conference, SEC Commissioner Gallagher stated his preference that the SEC approve a rule that would require investment advisers to have a third-party review of their operations.  The third-party review could be done by private parties including, but not limited to, SROs.  Sans the “including… SROs” language, Hamburger sees parity with a position taken by MarketCounsel for over a decade whereby, should the SEC make a showing that more frequent examinations of investment advisers would be beneficial to the SEC’s mission, the industry can best fill that gap by use of private sector resources, leveraging the open and competitive markets.  Ketchum, however, undoubtedly hones in on the bright, blinking letters “SRO” and sees a potential ‘open net’ allowing FINRA to assume the role of examiner in the fastest growing sector of the securities industry.

At a separate industry conference last week Brian Hamburger, founder of compliance consultancy MarketCounsel, suggested that the period between routine examinations is even longer than the SEC says. “The SEC likes to say they examine advisors every seven years, but you do the math…and it’s not every seven years,” he told advisors.  According to Hamburger, advisors ”get hit” with a routine exam closer to every 10 to 12 years.

While MarketCounsel continues to hold that the SEC is the best party to conduct adviser examinations, an independent, private sector examination would be far superior than the expense and oversight of an SRO that would most likely be FINRA.

Read more here.

Brian Hamburger Offers Two of @finplan’s Nine “Takeaways” From the Envestnet Advisor Summit

Wednesday, May 21st, 2014

In “9 Takeaways From the Envestnet Advisor Summit,” Financial Planning Magazine’s Samantha Allen takes two from Brian Hamburger:

“The SEC likes to say they examine advisors every seven years, but you do the math…and it’s not every seven years,” Brian Hamburger, founder and managing director of advisor compliance consultancy MarketCounsel, told advisors.  According to Hamburger, advisors “get hit” with a routine SEC exam closer to every 10 to 12 years.

Advisors should seriously consider their succession and business continuity plans, Brian Hamburger, founder and managing director of advisor compliance consultancy MarketCounsel, told attendees.  Given the relationship-driven nature of the business and the highly regulated nature of the industry, he said, it is critical to have a plan in place for the business and clients. “In the event of a loss of key personnel without directives in place, we are left scrambling,” he said. “It’s a mad dash.”

Read all 9 Takeaways here.

Commissioner Gallagher is a Proponent of Independent Examiners for Advisers

Tuesday, May 20th, 2014

SEC Commissioner Daniel Gallagher has been outspoken recently about his belief that the SEC cannot properly supervise investment advisers and praising broker-dealers under FINRA’s supervision.  During each speech he has given over the past month or so, he has added a new position on fiduciary harmonization or examination of investment advisers.  First, he said that he didn’t know what “harmonization” really meant and that the SEC didn’t have consensus on how to move forward.  More recently, he said that brokers are only subject to more enforcement because they are examined more frequently (by FINRA) and that bad reps were hiding-out at investment adviser firms.

The latest development from Commissioner Gallagher was reported by InvestmentNews.  At the FINRA annual conference, Commissioner Gallagher stated his preference that the SEC approve a rule that would require investment advisers to have a third-party review of their operations.  The third-party review could be done by private parties including, but not limited to, SROs.  Because the private party would not have rule making or enforcement authority, Congressional involvement would not be necessary.

FINRA’s Chairman and CEO, Richard Ketchum, applauded the idea, but said that FINRA still has no intention of lobbying to revive the Spencer Bachus bill that would’ve required advisers to join an SRO.

If done correctly, this is an idea that MarketCounsel has expressed some support for.  While we feel that the SEC is the best party to conduct adviser examinations, an independent examination would be far superior than the expense and oversight of an SRO that would most likely be FINRA.

SEC Suffers Another Enforcement Loss on Appeal

Monday, May 19th, 2014

Reuters reported that the SEC lost a case of mutual fund “market timing” on appeal to the U.S. 2nd Circuit.  The SEC had won a verdict against Prudential Securities broker Frederick O’Meally for negligently exploiting market inefficiencies by conduct market timing in a number of mutual funds.

Jurors had found O’Meally not liable for intentional or reckless conduct, but liable for negligence for trading at six of mutual funds.   The appeals court decided that no reasonable juror could have found O’Meally negligent and the it was not unreasonable for him to have believed that the market timing was allowed.  In the opinion overturning that verdict, Judge Dennis Jacobs said the evidence “establishes without contradiction that the funds were inconsistent in their proscriptions on market timing and that Prudential supported O’Meally’s practices.”  So basically, O’Meally won with a defense that ‘everyone else was doing it, so how should I have known it was wrong?

Entrepreneur and SEC critic Mark Cuban, who recently beat the SEC in an insider trading case, tweeted a link to the Reuters article and said, “Oops the SEC did it again. Over reaching and under thinking.”