Articles Posted in Investment Advisers

Custodial Firms Get Tougher About Registered Investment Adviser Compliance

Published on: December 28, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to Investment News, in the wake of the Bernie Madoff Ponzi scam and the recent financial meltdown, custodial firms are taking a tougher stance when it comes to the compliance they expect from registered investment advisers. This tighter scrutiny can make it hard for a new RIA with regulatory issues, as well as for investment advisers that are already at established custodial firms.

Trust Company America chief executive Frank Maiorano is quoted in the publication as saying that if “something came up” during a background check or the ADV, his firm would consider whether to let the RIA go. RBC Correspondent and Advisers says that it has had to ask advisers to leave. Schwab advisers are contractually obliged to tell the company about “material changes in status.” Schwab also monitors regulatory actions and may even look into “certain types of activities” occurring in advisers’ client accounts for red flags that could later impact the firm.

RIAs of both smaller and larger custodial firms are apparently feeling the heat from companies that are no longer willing to put up with potentially bad behavior that can lead to investment adviser fraud. This, even as most custodial firms continue to stay quiet about the type of due diligence they conduct on their advisers because they don’t want investors or plaintiffs’ lawyers to think of them as accountable for an adviser’s investment strategy or his/her supervision.

Just as custodial firms, which are service provider to advisers, are not responsible for supervising RIAs, they also cannot discipline them. They can, however, choose whether or not to work with an adviser.

Custodians usually will work with an independent review committee to vet new clients, conduct background and credit checks, and review ADV and U-4 forms. They may also look out for pending complaints, regulatory issues, and criminal actions.

Related Web Resources:
Custodians taking closer look at adviser compliance, Investment News, December 27, 2010

Investment Adviser, What you need to know before choosing one, SEC

Securities Fraud Attorneys

The “New” SEC is Acting Just Like The “Old” SEC by Protecting the Securities Industry from Responsibility for its Actions

Published on: December 9, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has announced a proposal to temporarily extend a rule that facilitates certain proprietary trading by entities that are registered as both broker-dealers and investment advisers. The proposed extension would move Rule 206(3)-3T’s expiration date by two years, from December 31, 2010 to December 31, 2012. It would also would allow the SEC to complete a study mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Rule 206(3)-3T gives dually registered firms another way to satisfy consent and disclosure requirements that they would otherwise only be able to meet on a transaction-by-transaction basis. Having just the one option would limit the availability that non-discretionary advisory clients would have to certain securities.

The extension would give the SEC the time that it needs to study the regulatory issues related to dual registrants’ principal trading. Dodd-Frank is requiring the SEC to look at any divergent regulations between investment advisers and brokers and use rulemaking to fix gaps so as to better protect investors. The agency has until January 21, 2011 to notify Congress of its findings.

Dodd-Frank’s Section 913 has generated a lot of debate because it could allow for most broker-dealers to be considered fiduciaries under the 1940 Investment Advisers Act. Right now, brokers don’t have to meet the fiduciary standard that investment advisers must satisfy even though both offer similar services. However, instead of holding brokers to the statutory fiduciary standard, the SEC might end up obligating them to fulfill various consent and disclosure requirements at the start of a retail relationship.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Securities Fraud Attorney William Shepherd thinks that it is time to hold brokers responsible to a fiduciary standard: “The only educational requirement to become a licensed securities broker is four months of on-the-job training and the passing of a half-day test. Yet, on average, securities brokers at major firms are paid more than doctors, lawyers and other professionals who must often attain seven or eight years of higher education. Many clients entrust securities brokers with their life savings, retirement assets, and their financial life blood. Why shouldn’t these brokers and the firms required to supervise them be held responsible if the investors are ripped-off? Financial advisers perform the same function but have a fiduciary duty to investors, simply meaning they must put the client’s interest first when advising them. Why should securities brokers be held to a different standard and not be allowed to lull investors into trusting them, while selling their victims the highest commission products that they can find without regard to the client’s best interest? In fact, most state laws currently hold that when a broker is recommending securities to an unsophisticated investor, the broker has a fiduciary duty to that client. What the SEC is trying to do is to pass a rule that makes brokerage firms LESS RESPONSIBLE than they are at present. These endless tactics perpetrated by securities regulators, at the behest of Wall Street, and are yet another type of bail-out move by the Securities Cartel that controls this nation.”

Related Web Resources:
Read the Proposed Rule (PDF)

1940 Investment Advisers Act

Institutional Investor Securities Blog
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Investment Manager Accused of Securities Fraud Must Pay Defrauded Clients Over $20 Million

Published on: November 10, 2010 | by Shepherd Smith Edwards & Kantas, LLP

In a default judgment, The U.S. District Court for the Western District of Washington is mandating that investment adviser Enrique Villalba and affiliated entities pay investors over $20 million. The 47-year-old has been sentenced to almost 9 years in prison for defrauding clients of over $30 million.

Most of the funds that were taken from investors were lost in unauthorized, high risk investments in futures contracts. Villalba also used some of the funds to run Rico Latte coffee shops and purchase property. Among his victims was one woman who lost almost $12 million. Another man, former ER doctor David Ernst, lost his life savings. Tom Mulgrey, 56, lost $4 million.

Villalba has not been in touch with the plaintiffs of this securities fraud lawsuit since September 2009. His investment fraud victims are located in different US states. In their securities complaint, the plaintiffs are alleging claims under the Washington Securities Act and the 1934 Securities Exchange Act.

In granting the plaintiffs’ motion to obtain a default judgment, the court noted that per the two statutes, rescission is the way to calculate damages. In this case, the court deemed rescission appropriate because it “undoes the transactions” while returning the plaintiffs to their original state had they never invested their funds with the defendants.

Also, under the Washington Securities Act, the court determined that not only are the plaintiffs entitled to interest on the damages amount beginning the date of each deposit, but also they are entitled to recover lawyers’ fees and costs. The Washington Consumer Protection Act also entitles them to legal fees. Per the default judgment, the plaintiffs have been awarded $20,080,637.89, which includes the principal amount of $13,393,650.67, $6,669,053.22 in interest, and $17,934 in lawyers’ fees and costs.

Related Web Resources:
Court Orders Investment Manager To Pay Defrauded Clients Over $20 million, BNA/Alacrastore.com, November 5, 2010
Investment adviser caught in $30 million fraud sent to prison for almost 9 years, Cleveland.com, September 8, 2010
Read the Order

Securities Act of Washington
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SEC Charges Investment Adviser With Allegedly Making Unsuitable Hedge Fund Recommendations to Elderly Clients

Published on: October 15, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has charged investment adviser Neal Greenberg with securities fraud and breach of fiduciary duty related to the making of recommendations and marketing of hedge funds to investors. According to the SEC, Greenberg, who was the CEO of Tactical Allocation Services LLP and also the portfolio manager of Agile Group LLC, made unsuitable recommendations to clients, many of whom were elderly and/or retired or close to retirement, when he suggested that they invest in the hedge funds run by his firms.

The SEC contends that the investment adviser issued misstatements when he said that the hedge funds were suitable for older and conservative clients, many of whom were seeking low-risk investments that came with significant capital protection. For example, Greenberg allegedly “falsely stated that the Agile hedge funds” were low risk, highly diversified, and offered liquidity when in fact, the funds, which held approximately $174 million from over 100 clients, were non-diversified in their holdings and used leverage. Greenberg also is accused of claiming that the Agile funds “used leverage” in a manner that did not “significantly increase” their risk profile. Yet, says the SEC, for 2007 and 2008 the risk disclosures in private placement memoranda for the hedge funds from Agile contradicted the “false and misleading” misrepresentations made by Greenberg.

The SEC is also accusing Greenberg of failing to make sure that adequate compliance procedures and policies were put in place for determining whether certain investments were suitable for clients’ specific needs. The commission says Greenberg failed to tell clients that they were going to have to pay management and performance fees on the leveraged part of their investments. Between 2003 and 2006, investors paid about $2 million in these undisclosed fees.

Related Web Resource:
Read the SEC Order Against Greenberg (PDF)
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Most Investors Want Fiduciary Standard for Investment Advisers and Broker-Dealers, Say Trade Groups to SEC

Published on: October 12, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The North American Securities Administrators Association, the Consumer Federation of America, the Investment Adviser Association, the Financial Planning Association, AARP, and the National Association of Personal Financial Advisors have sent a letter to Securities and Exchange Commission Chairman Mary Schapiro asking that the agency examine a recent national survey that shows that the majority of investors don’t know the differences between investment advisers, brokers, and financial planners. ORC/Infogroup conducted the survey for the trade groups.

1,319 investors were polled. Per the survey, investors appear to “overwhelmingly believe” that representatives who provide investment advice should disclose conflicts of interest and act in clients’ best interests. Many of them are wrong in their belief that investment advisers, broker-dealers, and insurance agents are currently held to a fiduciary standard.

Among the Survey’s Other Findings:
• More than three out of five investors are under the wrong impression that there is no difference between an investment adviser and a stockbroker.

• About 1/3rd of investors are not clear about the role that stockbrokers play or what services that they offer.

The group told Schapiro that per the survey’s findings, a common standard should apply to investment advice that is given, regardless of whether the recommendation is made by an investment adviser or a broker-dealer. They say that the “principles-based fiduciary duty that applies under the [1940 Investment] Advisers Act” should be the standard. Per the survey, many investors feel that a fiduciary standard should also apply to insurance agents that sell investments.

Related Web Resources:
Investment Adviser Association

SEC Chairman Mary L. Schapiro

North American Securities Administrators Association

The Consumer Federation of America

Financial Planning Association

AARP

National Association of Personal Financial Advisor

ORC/Infogroup
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