Merrill Lynch abruptly parts ways with top financial adviser
http://www.ibj.com/articles/52207-merrill-lynch-abruptly-parts-ways-with-top-financial-adviser?utm_source=eight-at-8&utm_medium=newsletter&utm_campaign=2015-03-11
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Our firm will be looking into investor complaints against Tom Buck and the Buck Group as a result of his termination from Merrill Lynch.
Charles Schwab is set to introduce Schwab Intelligent Portfolios a FREE investment service for consumers wanting low-cost personalized advice but with minimal money to invest. Schwab will potentially trounce the competition given its established brand name and size.
Schwab is following the lead of a few smaller firms in regards to automated investing. Wealthfront, which has collected $2 billion in customer assets over its three-year existence, largely from people under 35, and Betterment, which has collected $1.55 billion since it opened in 2010. These smaller companies provide service to people with thousands, not millions, to invest and little to spend on investment advice. A unique service that is in high demand.
Naureen Hassan, an executive vice president of Schwab, says that “Schwab wanted to create a product that would appeal to the masses and get more people into well-diversified portfolios,” she said. Although the program does not officially become available to customers until later this month, its federal regulatory filing and website contain many of its details.
The major source of criticism in the service lies within the allocation of cash recommendations and with how the portfolios are constructed. The cash allotment will often be larger than many financial advisers recommend. For more information about Schwab’s new service click here https://intelligent.schwab.com/
Legislation introduced to the House last week could stop brokers and advisers from requiring investors to take claims to arbitration rather than court. Nearly all brokerage and a large amount of advisory agreements include provisions limiting investors into arbitration.
Written by Rep. Keith Ellison, D-Minn., the bill bans pre-dispute mandatory arbitration clauses in contracts between advisers and clients. The legislation also prohibits any restrictions on investors filing class action suits.
“Working Americans shouldn’t have to sign away their rights in order to work with a financial adviser or broker-dealer to build a secure retirement,” Mr. Ellison, a member of the House Financial Services Committee, said in a statement. “An investor’s right to recover monetary damages through legal action is critical. Working Americans will be more eager to invest their hard-earned dollars when we give them more rights in the financial marketplace.”
In 2013, Mr. Ellison submitted a similar bill. It failed to get a hearing in the House Financial Services Committee, which is controlled by Republicans. It died at the end of the congressional session last December and had to be reintroduced to the new Congress.
Republicans’ strengthened House majority and their Senate majority pose an even bigger challenge for Mr. Ellison’s legislation this time, but state regulators are not discouraged.
“State securities regulators believe that investor confidence in fair and equitable recourse is critical to the health of our securities markets and long-term investments by retail investors,” the North American Securities Administrators Association said in the legislative agenda it released Feb. 23.
Oppenheimer & Co. has been charged by the SEC for violating federal securities laws while wrongly selling penny stocks in unregistered offerings on behalf of clients. Oppenheimer admitted their wrongdoing and will pay $10 million to settle the SEC’s charges, as well as another $10 million to settle a parallel action by the Treasury Department’s Financial Crimes Enforcement Network.
The SEC found Oppenheimer engaged in two courses of misconduct. The first involved aiding and abetting illegal activity by a customer and ignoring red flags that business was being conducted without and valid exemption from the broker-dealer registration requirements of the federal securities laws. Oppenheimer failed to recognize the resulting liabilities and expenses in violation of the books-and-records requirements, and improperly recorded transactions for customers in Oppenheimer’s records. Oppenheimer also failed to file Suspicious Activity Reports as mandatory under the Bank Secrecy Act to report potential misconduct and its clients, and the firm failed to properly report, withhold, and remit more than $3 million in backup withholding taxes from sales profits. .
The second course of misconduct involved Oppenheimer again engaging on behalf of another client in unregistered sales of billions of shares of penny stocks. The firm’s liability stems from its failure to react to red flags and conduct a searching inquiry into whether the sales were exempt from registration requirements of the federal securities laws, and its failure reasonably to supervise with a view toward detecting and preventing violations of the registration provisions. The SEC’s investigation, which is continuing, discovered that the sales generated approximately $12 million in profits of which Oppenheimer was paid $588,400 in commissions.
The SEC’s order is requiring Oppenheimer to stop and abstain from committing or causing any violations and any future violations of Section 15(a) and 17(a) of the Securities Exchange Act of 1934 and Rules 17a-3 and 17a-8, and of Section 5 of the Securities Act of 1933. In addition to the financial remedies, Oppenheimer agreed to be censured and undertake such corrective measures as retaining an independent consultant to review its policies and procedures over a five-year period.
A top economic adviser under President Obama is calling for stricter rules on Wall Street after finding some bad broker practices costing investors $8 billion to $17 billion a year.
Chairman of President Obama’s Council of Economic Advisers, Jason Furman, found research showing some broker practices, such as boosting commissions with excessive trading, is costing investors billions. The White House is considering tighter oversight of brokers who handle retirement accounts.
In a Jan. 13th memo, drafted by Furman to the White House, calls for a Labor Department regulation that would impose a fiduciary duty on brokers handling retirement accounts, requiring them to act in their clients’ best interest. Under current procedures, brokers are held to a ‘suitability’ standard, meaning they must sensibly believe their recommendation is right for a customer.
Over the past four years or so, Wall Street has been lobbying against the Labor rule. Firms such as, Morgan Stanley and Bank of America Corp. have been leading the charge. Arguing that costlier regulations would take away options for smaller investors, who would lose access to advice as well as investment choices.
The Labor Department’s official proposal could come as soon as this month. It is important to note that this draft rule will not ban sales commissions and will require brokers to guard against conflicts and avoid “certain self-dealing transactions”.
For more details about the Jan. 13th memo click here.
The Examination priorities for 2015 address issues across a variety of financial institutions, including investment advisers, investment companies, broker-dealers, transfer agents, clearing agencies, and national securities exchanges. Areas of examination include:
Market-Wide Risks – The SEC will examine for structural risks and trends that involve multiple firms or entire industries, including: monitoring large broker-dealers and asset managers in coordination with their policy divisions, conducting annual examinations of clearing agencies as required by the Dodd-Frank Act, assessing cybersecurity controls across a range of industry participants, and examining broker-dealers’ compliance with best execution duties in routing equity order flow.
Retail Investors – Retail investors are being offered products and services that were formerly characterized as alternative or institutional, including private funds, illiquid investments, and structured products. Additionally, financial services firms are offering a broad array of information, advice, products, and services to help retail investors plan for and live in retirement. The SEC will evaluate risks to retail investors that can arise from these trends.
Data Analytics – Significant enhancements have been made that enable exam staff to analyze large amounts of data efficiently and effectively. The SEC will use these capabilities to focus on registrants and registered representatives that appear to be possibly doing illegal activity.
These priorities for 2015 can be adjusted depending on market conditions, industry developments, and ongoing risk assessment activities. To view the actual report see below.
EXAMINATION PRIORITIES FOR 2015
Introduction
This document identifies selected 2015 examination priorities of the Office of Compliance Inspections and Examinations (“OCIE,” “we” or “our”) of the Securities and Exchange Commission (“SEC” or “Commission”). In general, the priorities reflect certain practices and products that OCIE perceives to present potentially heightened risk to investors and/or the integrity of our capital markets.1
OCIE serves as the “eyes and ears” of the SEC. We conduct examinations of registered entities to promote compliance, prevent fraud, identify risk, and inform policy.2 We selected our 2015 examination priorities in consultation with the five Commissioners, senior staff from the SEC’s eleven regional offices, the SEC’s policy-making and enforcement divisions, the SEC’s Investor Advocate, and our fellow regulators.
This year, our priorities focus on issues involving investment advisers, broker-dealers, and transfer agents and are organized around three thematic areas: 1. Examining matters of importance to retail investors and investors saving for retirement, including whether the information, advice, products, and services being offered is consistent with applicable laws, rules, and regulations; 2. Assessing issues related to market-wide risks; and 3. Using our evolving ability to analyze data to identify and examine registrants that may be engaged in illegal activity, such as excessive trading and penny stock pump-and-dump schemes.
This document does not address OCIE’s examination priorities for exchanges and SROs, which we are addressing separately.
1 This document was prepared by SEC staff, and the views expressed herein are those of OCIE. The Commission has expressed no view on this document’s contents. It is not legal advice; it is not intended to, does not, and may not be relied upon to create any rights, substantive or procedural, enforceable at law by any party in any matter civil or criminal. 2 The registered entities that OCIE examines include investment advisers, investment companies, brokerdealers, exchanges, self-regulatory organizations (“SROs”), clearing agencies, municipal advisors, and transfer agents.
2
Retail investors of all ages face a complex and evolving set of options when determining how to invest their money, including retirement funds. Registrants are developing and offering to retail investors a variety of new products and services that were formerly characterized as alternative or institutional, including private funds, illiquid investments, and structured products intended to generate higher yields in a low-interest rate environment. Additionally, as investors are more dependent than ever on their own investments for retirement,3 the financial services industry is offering a broad array of information, advice, products, and services to retail investors to help them plan for, and live in, their retirement years. We are planning various examination initiatives to assess risks to retail investors that can arise from these trends.
3 For decades, employers have shifted from offering defined benefit pensions to defined contribution plans, such as 401(k) accounts, that place funding and investment risk directly on participants. Today, it is estimated that approximately $15.8 trillion is invested in defined contribution plans (including individual retirement accounts and annuity reserves), while approximately $8.3 trillion is invested in defined benefit plans. See Nari Rhee, “Retirement Savings Crisis: Is it Worse than We Think” (June 2013), a publication of the NATIONAL INSTITUTE ON RETIREMENT SECURITY, available at: http://www.nirsonline.org/index.php?option=com_content&task=view&id=768&Itemid=48; see also “Retirement Assets Total $24 Trillion in Second Quarter 2014” (Sept. 2014), a publication of the INVESTMENT COMPANY INSTITUTE, available at: http://www.ici.org/research/stats/retirement/ret_14_q2.
3
analytics to identify branches that may be deviating from compliance practices of the firm’s home office.
III. Assessing Market-Wide Risks
The SEC’s mission includes not only investor protection and capital formation, but also maintaining fair, orderly, and efficient markets. With examination authority over a wide variety of registrants, we intend to examine for structural risks and trends that may involve multiple firms or entire industries. In 2015, we will focus on the following initiatives:
4
Over the last several years, OCIE has made significant enhancements in data analytics that enable us to efficiently and effectively analyze the data to which we have access. We will use these capabilities to focus on registrants and firms that appear to be potentially engaged in fraudulent and/or other potential illegal activity, including the following examination initiatives:
In addition to examinations related to the themes described above, we expect to allocate examination resources to other priorities, including:
5
This description of OCIE priorities is not exhaustive. While we expect to allocate significant resources throughout 2015 to the examination issues described herein, our staff will also conduct examinations focused on risks, issues, and policy matters that arise from market developments, new information learned from examinations or other sources, including tips, complaints, and referrals, and coordination with other regulators.
OCIE welcomes comments and suggestions about how we can better fulfill our mission to promote compliance, prevent fraud, monitor risk, and inform SEC policy. If you suspect or observe activity that may violate the federal securities laws or otherwise operates to harm investors, please notify us at http://www.sec.gov/complaint/info_tipscomplaint.shtml
FINRA has announced that a hearing panel expelled John Thomas Financial and barred its Chief Executive Officer, Tommy Belesis, from the securities industry. They violations are in connection with the sale of America West Resources, Inc. common stock, including trading ahead of customers’ orders, recordkeeping violations, violating just and equitable principles of trade, and for providing false testimony. The panel ordered has ordered them to pay $1,047,288, plus interest, to customers. In addition, they have been suspended for two years and fined $100,000, and the Chief Compliance Officer Joseph Castellano is suspended for one year and fined $50,000, for harassing and intimidating registered representatives. The panel also found they intimidated and harassed representatives who resigned by filing false Forms U5 indicating that the firm had a reasonable basis for investigating these individuals for serious misconduct, when this was not the case. In addition, the decision noted that Belesis provided false testimony to FINRA.
According to the decision, “Belesis testified that he was ‘not familiar’ with the recordkeeping requirements, and claimed that he was unfamiliar even with the fundamental requirement that the firm preserve order tickets for three years.” The panel noted that it did not find Belesis’ claims of ignorance credible given the length and breadth of his experience in the securities industry, and inferred that “they either concealed or destroyed order tickets.”
The panel dismissed charges alleging fraud, best execution violations, failure to follow customer orders, making misrepresentations to customers and failure to supervise. The ruling resolves charges brought by FINRA’s Department of Enforcement from April 2013. The hearing panel’s decision becomes final after 45 days, unless the panel’s decision is appealed to FINRA’s National Adjudicatory Council (NAC), or is called for review by the NAC.
Attorney Mark Maddox wrote the below article for the IBJ that was published over the past weekend.
Do you remember 2008? That’s the year that we learned that the Big Banks engaged in massive bets with their depositors’ money on complicated derivatives that were ultimately backed by thousands of bogus mortgages that should never have been loaned in the first place.
Do you remember what resulted from Wall Street’s big bets going bust? Just a little economic disturbance that we now call the Great Recession of 2008 that caused massive job losses, huge market losses, business closures, and general unhappiness along Main Street that many still feel today.
Do you remember the federal government’s reaction to the Great Recession? It started with a $700 Billion bank bailout that became known as TARP. Since the banks had made crazy bets with depositors’ money on complex and risky derivatives called swaps, the entire banking system was at risk of failing. The federal government had no choice but to step in and shore up the collapsing system with our taxpayer money. Too big to fail was now a reality.
But Congress didn’t stop there. Many Americans believed that whatever caused the Great Recession should not be permitted to happen again. Most of the country seemed to agree that the reckless gambling on Wall Street with depositors’ money should never again be able to threaten the jobs and livelihoods on Main Street. So in 2010, Dodd-Frank was passed which contained a provision prohibiting banks from using depositors’ funds to speculate on these complex and speculative derivatives. It was still okay if the Banks wanted to use their own money to make these risky bets, but they simply couldn’t use their customers’ funds and put the entire banking system at risk yet again.
Fast forward to 2014, a mere four years after Dodd-Frank was passed and six years since Wall Street marched the world up to the precipice of financial Armageddon. The Dodd-Frank provision prohibiting commercial banks from using depositors’ funds to speculate on risky derivatives was removed as part of the recent Congressional budget bill. Shockingly, Wall Street is once again almost unrestrained to engage in the same sort of conduct that put us all at risk a mere six years ago.
This is unfortunately the way history repeats itself in the world of financial regulation. Inevitably, in order to maximize its profits, Wall Street engages in bad conduct that results in severe harm to the public good. Congress or the SEC cracks down on the bad conduct for a few years. Wall Street then aggressively lobbies the federal government to cause the tougher regulations to be pulled back. Then the whole ugly cycle repeats itself again and again.
I will never accept that one of the federal government’s main priorities is to help Citigroup or JP Morgan achieve greater profits. It should be protecting the interests of all of its citizens. It should be protecting the depositors of our commercial banks from reckless conduct by the banks’ top officers. It should be protecting the American taxpayers from having to bail out “too big to fail” banks from their own speculative bets. And it should have the gumption to criminally prosecute the “too big to jail” Wall Street criminals for their misconduct. Unfortunately, Wall Street has invested so much money in the federal government that it now owns both political parties, and can effectively write its own legislation as it did with the budget bill. We are all at the mercy of the Wall Street titans more so than ever before.
FINRA has fined Merrill Lynch, Pierce, Fenner & Smith Incorporated $1.9 million for fair pricing and supervisory violations in connection with more than 700 retail customer transactions in distressed securities over a two-year time period. Merrill Lynch was also ordered to pay more than $540,000 in restitution, plus interest, to affected customers.
It was found that Merrill Lynch’s Global Banking & Markets Credit Trading Desk purchased Motors Liquidation Company Senior Notes (MLC Notes) from retail customers at prices 5.3 percent to 61.5 percent below the prevailing market price. As a result, in 716 instances, Merrill Lynch purchased MLC Notes at prices that were not fair to its retail customers. The notes were originally issued by General Motors Corporation prior to its bankruptcy. Also, Merrill Lynch did not have an acceptable supervisory system in place and specifically, did not conduct post-trade best execution or fair pricing reviews of these transactions, or conduct fair pricing or best execution post-trade reviews of other retail customer trades executed on the Credit Desk.
Thomas Gira, FINRA Executive Vice President and Head of Market Regulation, said, “We expect firms to adhere to their fair pricing obligations to customers when transacting in lower-priced or distressed securities. Even after factoring in the nature of the market for these types of instruments, the markdowns charged were simply unacceptable, as was Merrill Lynch’s failure to conduct post-trade fair pricing or best execution reviews for customer transactions executed on the Credit Desk.”
Merrill Lynch has been ordered to deliver three reports over the next 18 months regarding the effectiveness of the firm’s supervisory system with respect to the pricing of retail customer transactions executed by the Credit Desk, as part of the sanctions.