By
Cory Roberson, Principal at FIN Compliance and FIN Lancer
Case #1 – Excessive Trading, Suitability, and Client Transactions
September 10, 2018 - The Securities
and Exchange Commission (“SEC”) charged two registered representatives
(“brokers”) for recommending excessive trades to its retail customers. The SEC claimed
that the activity generated large commissions for the brokers and ultimately
lost money for many of their clients.
The claims are staggering --- customers who were mostly into
retirement age, lost approximately $3.6 million due to the excessive trades while
the brokers netted about $4.6 million in commissions.
Tips for Compliance:
Advisors/Broker-Dealers should gather any/all of the following for its suitability analysis:
Financial
status - what is the client’s
debt/income ratio?
Existing
assets – house, stocks, bonds, income
producing vehicles
Tax
status - future/current tax obligations
*Visit RIA Review (Premium/Premium Plus): Guidelines: Client
Onboarding: Client Notes/Suitability - for a complete summary of
suitability materials*
Ref. SEC (advisors act) *, FINRA Rule
2111, SEC (company act).
Case #2 – Unregistered Fund Activity & Misleading Advertising
Claims
September 11, 2018 —The Securities
and Exchange Commission (“SEC”) charged a digital assets hedge fund manager
(“Crypto Fund”) with a violation to its investment company registration statutes.
The
SEC claimed that the crypto fund operated as an unregistered investment company
while marketing itself as the “first
regulated crypto asset fund in the United States.”
According
to the SEC, the fund and its manager claimed it filed for registration with the
SEC when no such activities were made.
As a result of the fund’s non-exempt public offerings, the manager was
deemed to be operating as an unregistered investment company.
The
manager, without admitting or denying claims, agreed to pay a penalty in the
amount of $200,000.
Tips for Compliance
Contact
a securities attorney and/or compliance person for filing steps.
Register
the investment business within the appropriate jurisdictions.
Create
a compliance program for monitoring procedures and procedures.
Ref. SEC Rule 206(4)-1 (advisors act) *,
SEC Rule 482 (company act), Investment Company Act (Registration), Investment
Advisors Act (registration).
Case
#3 – Suitability, Fraud, Fees and Commissions
September 14,
2018. The Securities and
Exchange Commission (“SEC”) charged a Midwest investment advisory firm and its
sole owner (“firm”) with selling $13 million in high-risk securities to more
than 120 advisory clients – many of whom were new to such stock recommendations
– without prior disclosure that the firm would receive commissions of up to 18
percent from the transactions.
Allegedly, during
a 4-year period, the firm sold shares in a private company that has a prior
disciplinary history with the SEC. Notably, the firm received commissions
of cash and warrants from the stock sales that were worth more than $2.5
million (at time of charges).
As a tipping point
in the fraudulent activities, the SEC alleges that the defendants also created
false invoices and other deceptive tactics to conceal the securities
transactions.
In light of these
findings, the firm is accused of violating antifraud and broker-dealer
registration provisions associated with federal securities laws.
Tips for Compliance
Perform a suitability review for client
transactions.
Disclose agency cross transactions (when/if applicable).
Test fees or commissions for inaccuracies
and/or violations.
Research company history prior to
recommending specific stocks to clients.
Disclose any conflicts of interests for
transactions (e.g. charging clients an
advisory fee and a commission).
Ref. SEC (advisors
act); FINRA Rule 2111 (broker-dealers).
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Compliance and Business Management
FIN Compliance (FINCompliance.io) is a
consortium of compliance services including: RIA Consults-Roberson Consults
Group, a compliance consulting firm, RIA Review, a compliance-management
software tool (SaaS), B-D Review, a RIA/Broker-Dealer compliance management
software tool, and FINLancer is a business
management portal featuring: E-signature tools; Invoicing integration,
Vendor Directory, continuity directory*, business client document portal, and
more (available by Q3 2019). Access all services
on one site: FINCompliance.io.
Impact
FIN Missions (FINmissions.com) provides business support group
sessions for other entrepreneurs. In addition, Cory has volunteered
for more than fifteen youth programs in locations such as like S. Korea, China,
S. Africa, Thailand, and India.
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