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House Financial Services Committee Hears Arguments Over Who Should Oversee Investment Advisers

Published on: June 9, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Last week, the House Financial Services Committee held a hearing about the Investment Adviser Oversight Act of 2012, a bill introduced by the committee’s chairman, Rep. Spencer Bachus (R-Ala.), and Rep. Carolyn McCarthy (D-N.Y.). The two lawmakers had come up with (HR 4624) because they believe that the US Securities and Exchange Commission, which has been supervising investment advisers, doesn’t have the resources to do this job effectively.

While there has long been discussion over this issue, the 2008 financial crisis and the discovery of Bernard Madoff’s multibillion-dollar Ponzi scam, which had been going on for years, served to some as evidence that the SEC wasn’t doing a thorough enough job of detecting financial fraud. Last year, the Securities and Exchange Commission issued a study acknowledging that its resources were limited. It too recommended that the Financial Industry Regulatory Authority or a new SRO be given the responsibility of overseeing investment advisers. Or, if it were to continue this oversight, then the Commission suggested that it work with an enhanced oversight program paid for with user fees.

While all sides involved in the debate are in agreement that registered investment advisers are not being examined on a regular basis, they can’t seem agree on how to make additional exams happen or on who should facilitate them. Unlike broker-dealers, investment advisers don’t have a self-policing group. They are usually examined by the states or the US.

Measure Banning Insider Trading Gains Support of Congress Members

Published on: September 24, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to Bloomberg Businessweek, both Republicans and Democrats appear to be getting behind a House measure that forbids insider trading by lawmakers. The legislation would consider any trading on legislation done by lawmakers or their staffers as securities fraud. Also, trades over $1,000 would have to be reported within three months.

The measure mandates that regulators draft rules preventing intelligence firms and individuals from selling nonpublic data that they receive from federal employees. Individuals and firms taking part in political intelligence would have to register just the way federal lobbyists do.

US Senator Kirsten Gillibrand (D-NY)’s bipartisan legislation would revise the definition of insider trading to include information obtained from congressional work. Her bill also calls for new reporting requirements for transactions.

The issue of lawmakers engaging in insider trading grew after 60 Minutes reported that Congressional members purchased companies’ stock during debates on laws that could affect the businesses. The report said that the investments under scrutiny weren’t illegal. Following the airing of the CBS News program, however, the measure, which is called the STOCK (Stop Trading on Congressional Knowledge) Act and was first introduced in 2006, saw its number of co-sponsors rise to 171 House members.

Meantime, the Securities and Exchange Commissioning is cautioning against this type of insider trading ban for lawmakers over concern that this prohibition might narrow certain existing laws. SEC Enforcement Director Robert Khuzami cautioned that any revisions should be “carefully calibrated” so that insider trading prosecutions that don’t involve Congressional members are not negatively impacted. Currently, the SEC uses general anti-fraud provisions to pursue those engaged in insider trading. These laws have never been applied to prosecuting lawmakers.

Rather than a congressional insider trading ban, Khuzami suggested the establishment of an explicit fiduciary obligation among Congress members to keep information obtained while on the job confidential and off limits for purposes of personal gain. General duty would then be used to pursue those that engage in insider trading.

House and Senate panels are expected to vote on an insider-trading ban, possibly as early as next year. The House Financial Services Committee and the Senate Homeland Security and Governmental Affairs Committee will vote on the STOCK Act this year.

Our stockbroker fraud attorneys work victims of insider trading. We have successfully helped thousands of investors throughout the country in recouping their money. We also have represented investors located abroad that have claims against investment firms based in the US.

Congressional Insider-Trading Ban Gains Bipartisan Support, Bloomberg Businessweek, December 7, 2011
SEC warns on congressional insider trading ban, Reuters, December 6, 2011

More Blog Posts:
Fiduciary Standard in Securities Industry Doesn’t Need New Definition, Stockbroker Fraud Blog, November 26, 2010
Hedge Fund Manager Raj Rajaratnam Ordered by SEC to Pay $92.8M Penalty for Insider Trading, Stockbroker Fraud Blog, November 12, 2011
Insider Trading: Former FrontPoint Partners Hedge Fund Manager Pleads Guilty to Criminal Charges, Institutional Investor Securities Blog, August 20, 2011
**This post has been backdated for publication
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Fiduciary Standard in Securities Industry Doesn’t Need New Definition

Published on: November 26, 2010 | by Shepherd Smith Edwards & Kantas, LLP

Financial Industry Regulatory Authority Chairman and Chief Executive Officer Richard Ketchum says that there should be just one flexible, fiduciary standard for investment advisers and broker-dealers who offer personalized investment advice. Ketchum spoke at a conference earlier this month.

Ketchum noted that seeing as investment advisers and broker-dealers essentially work in the same business, it “doesn’t make sense” to act as if they work in different ones. He supports a flexible fiduciary standard that comes with a “few basic, simple rules.”

As to whether FINRA could play a part in supervising the imposition of a future fiduciary standard on broker-dealers, Ketchum said that if FINRA were to play this role it would do so with a discreet board that would include a minority of investment adviser professionals, as well as members of the public. While investment advisers currently have to comply with a fiduciary standard and are regulated under the 1940 Investment Advisers Act, broker-dealers must be in compliance with other standards, including an obligation to make sure that their recommendations to clients are “suitable” ones.

Securities and Exchange Commission Chairman Mary L. Schapiro has also shown a preference for a uniform fiduciary standard between the two groups. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has until January 21, 2011 to turn in a report to the House Financial Services Committee about this matter. After completing its study, the SEC can write rules to establish a uniform standard of conduct for professionals who give retail clients personalized investment advice. However, the rule cannot be “less stringent” than current investment adviser standards.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Attorney William Shepherd had this to say about a fiduciary duty: “There is no need for disagreement over what kind of language should be use to define fiduciary duty in the securities industry. The term ‘fiduciary’ comes from the Latin word fides, which means faith, and fiducia, which means trust. English Common law, upon which our legal system was founded, long ago defined a fiduciary duty as a duty of loyalty and care, in which the fiduciary must put the interest of his client before that of himself. Courts all across our nation today recognize this same duty in a variety of relationships. The meaning of ‘fiduciary duty’ has been established for hundreds of years, so why would Wall Street need to have its own special definition? If it ain’t broke, why fix it?”

Related Web Resources:
Fiduciary Standard, More Adviser Oversight Likely -Finra Chief, The Wall Street Journal, November 16, 2010
Investment Advisers Act of 1940
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House and Senate Negotiators Can’t Seem to Agree on Fiduciary Standard in Financial Regulatory Reform Bill

Published on: June 17, 2010 | by Shepherd Smith Edwards & Kantas, LLP

According to InvestmentNews, negotiators in the Senate and the House have reached an impasse regarding the fiduciary standard provision found in the financial regulatory reform bill. While the House wants the US Securities and Exchange Commission to impose a universal standard of care that would be applicable to anyone offering personalized investment advice to retail clients, such as investment advisers, insurance agents, and broker-dealers, to reveal conflicts of interests and act in clients’ best interests-the Senate only wants the SEC to examine the issue for a year before proceeding to rulemaking.

According to Securities Fraud Lawyer William Shepherd, “Virtually all advisory professionals have a fiduciary duty to their clients, and brokerage firms claim to be professionals. Having a ‘fiduciary duty’ means professionals cannot put their own interests ahead of their clients. All types of ‘financial advisors’ were considered fiduciaries, until some Wall Street-friendly judges said otherwise. Congress needs to pass a law restating that brokers are fiduciaries. If not, rest assured that Wall Street will use lack of clarification as proof they do not owe an affirmative duty to their own clients.”

While speaking before the Financial Industry Regulatory Authority on May 27, US Deputy Treasury Secretary Neal Wolin says that the White House is strongly in favor of making retail brokers subject to the toughest possible consumer protection while also having them abide by a fiduciary duty. Wolin also says that the Obama Administration wants heightened regulation of credit rating agencies, Volcker rule limits on banks’ proprietary trading activities, and effective resolution authority against failed companies.

Stockbroker Fraud Attorney Shepherd says “It is preposterous to even say that stockbrokers are not fiduciaries. The law (Investment Advisors Act of 1940) says that those who advise clients regarding securities are held to a fiduciary standard. Meanwhile, stockbrokers insist they are not just order takers – which people pay $8.00 to get online – but are instead ‘advisors,’ ‘financial consultants,’ etc. who can charge 10 to 100 times what online trades cost. Wall Street wants to make the big bucks, but not have any duties to their clients. It’s simple as that.”

Related Web Resources:
House-Senate negotiators hit impasse on fiduciary standard, InvestmentNews, June 17, 2010
Treasury’s Wolin Vows Fight for Broker Fiduciary Duty in Reform Law, Investment Advisor, May 27, 2010
Financial Regulatory Reform, New York Times, June 15, 2010 Continue Reading ›

Republican Senator Seeks to Water Down Fiduciary Standards in Pending Investor Rights Bill and Exempt Insurance Companies from Liability

Published on: May 27, 2010 | by Shepherd Smith Edwards & Kantas, LLP

The North American Securities Administrators Association is criticizing an amendment introduced by Sen. Susan Collins (R-Maine). SA 4009, an amendment to the Senate financial regulatory reform bill (S. 3217), would protect variable annuities sellers from the fiduciary standard. While her amendment imposes a fiduciary standard on broker-dealers that offer investment advice to retail customers, variable contract products and representative-investment companies would not have to adhere to this standard.

The NASAA and other critics say that the amendment proposes a weaker version of the standard that would leave the very victims the standard is supposed to protect in a vulnerable position. NASAA also says that Collins’ proposed standard falls short of the standard in the way that 1940 Investment Advisers Act defines it. In a release issued earlier this month, NASAA says that with seniors and other small investors often having to contend with abusive practices from agents and brokers who end up recommending certain products because they come with higher commissions or revenue sharing payments, NASAA stressed the need for Congress to require that investment advisers and brokers abide by “the fiduciary duty of the Investment Advisers Act.” The Consumer Federation of America agrees with NASAA’s position on the Collins amendment.

NASAA is placing its support behind amendment (SA 3889). Referred to as the “Honest Broker” amendment, the legislation proposes that the Securities and Exchange Commission adopt a rule that would extend the fiduciary duty under the Advisers Act to brokers who offer investment advice. SA 3889 was introduced by Senators Daniel Akaka (D-Hawaii) and Robert Menendez (D-N.J.).

Other proposed amendments include SA 3806, by Senator Ted Kaufman (D-Del.) and Sens. Arlen Specter (D-Pa.). Their amendment extends the fiduciary duty under the Advisers Act to broker-dealers. Their amendment also proposes criminal liability for willful violations of the duty. SA 3792, introduced by Sen. Barbara Boxer (D-Calif.), would make each financial services provider subject to a fiduciary duty. The amendment gives Commodity Futures Trading Commission and the SEC the authority to define, enforce, and clarify the duty for regulated enitites under their jurisdictions.

Related Web Resources:
Joint Letter Opposing Collins Amendment (PDF)

S.3217 – Restoring American Financial Stability Act of 2010
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