The only thing worse than being the victim of broker misconduct is getting an arbitration award against the broker and then not being able to collect. Today, the Public Investors Arbitration Bar Association (“PIABA”) released a report that found that a National Arbitration Recovery Pool is a feasible solution to the serious problem of customer awards in FINRA cases going unpaid. PIABA’s report also sheds light on a potential transparency issue for FINRA in that the most recent data provided to PIABA was stale (from 2013) and was insufficient to reflect the true magnitude of the unpaid awards problem.
Last week, the Securities and Exchange Commission (“SEC”) issued a press release announcing a settlement it had reached with State Street Bank and Trust Company for a “pay-to-play” arrangement it had with a former deputy treasurer in Ohio (SEC Press Release). A pay-to-play scheme is achieved when someone affiliated with a bank or investment fund bribes (or otherwise monetarily “incentivizes”) a decision-maker for a government investor to throw lucrative business the way of the bank or investment fund. Of course, as with most illegal activities, the trickiest part of the scheme is not getting caught. Here, the players got caught.
According to the SEC, State Street’s former senior vice president and head of the public funds group at State Street, Vincent DeBaggis, had an agreement with a former deputy treasurer for Ohio, whereby Ohio entered into lucrative investment-related contracts with State Street in exchange for prohibited cash payments and campaign contributions made by DeBaggis on behalf of State Street (State Street Order). State Street has agreed to pay $4 million for disgorgement and prejudgment interest and $8 million as a penalty.
The SEC also reached a settlement with DeBaggis for the same misconduct. For his part, DeBaggis must pay disgorgement of $150,000, plus prejudgment interest of $24,202.81, as well as a penalty of $100,000 (DeBaggis Order). Just last week, the SEC filed a Complaint against lawyer and lobbyist charging him for his involvement in the pay-to-play scheme (Complaint). According to the SEC, the Ohio players from the treasurer’s office were criminally convicted for other misconduct and are in federal prison.
The Office of Compliance Inspections and Examinations (“OCIE”) of the Securities and Exchange Commission (SEC) has announced its examination priorities for 2016 (SEC press release). The OCIE arrived at the priorities after consulting with the SEC Commissioners, and the staff of SEC divisions and regional offices, along with other regulators.
Those priorities are said to “reflect certain practices and products OCIE perceives to present potentially heightened risk to investors and/or the integrity of the U.S. capital markets.” The OCIE is tasked with conducting examinations/inspections of entities regulated by the SEC and it plans to focus on the same three areas in 2016 as it did in 2015 (i.e., matters that are important to non-institutional investors, issues related to risks that are market-wide, and utilizing data to identify and investigate those that could be acting illegally).
(1) Non-Institutional Investors: As more employers use defined contribution plans, like 401k accounts, in lieu of defined benefit pensions, more employees are having to get more involved in determining how and where their retirement dollars should be invested. One result of the additional involvement by individual investors in planning for their retirement is an expansion in the services and types of investment products that are offered to those individual investors. This trend has made it all the more important for the SEC to effectively assess risks to non-institutional (also known as “retail investors”).
One of the initiatives of the OCIE in 2016 will include a continued focus on investment advisers and broker-dealers and the advice they give in relation to investment accounts (including retirement accounts). Other initiatives will include a focus on certain types of risky or costly products such as Exchange-Traded Funds (“ETFs”). The OCIE’s initiatives in 2016 will also include a continued review of Branch Office supervision files for troublesome trading in certain branches and an additional focus on advisers whose clients are government entities (known as “pension plan advisers”) to ensure that they are not giving advice that is conflicted by undisclosed perks provided to the adviser in exchange for recommendation of certain investments.
(2) Industry-Wide Risks: In an effort to maintain fair, orderly and efficient financial markets, the SEC will also focus in 2016 on the initiatives that could impact certain segments, or even all, of the securities industry. Such initiatives will include examining cybersecurity compliance and controls; assessing and evaluating key market participants known as “SCI” (“Systems Compliance and Integrity”) entities in relation to the uniform requirements they have established for the automated systems of market participants and utilities; examining various controls at firms involved in the fixed income markets where there is exposure to potential liquidity issues; and continuing to conduct examinations of certain clearing agencies as required by the Dodd-Frank Act and the Consumer Protection Act.
(3) Signs of Possible Illegal Conduct: In 2016, the OCIE will continue using data and information obtained in its own examinations and in regulatory filings to identify those that seem to have “an elevated risk profile.” For example, the OCIE will keep an eye out for repeat offenders and their employing firms; broker-dealers that do not seem to be complying with what the SEC expects in relation to their Anti-Money Laundering (“AML”) programs; fraudulent conduct like market manipulation, excessive trading; and inappropriate recommendation of certain new, complex and high risk products.
The OCIE also intends to focus on some other priorities such as newly-registered municipal advisors, sales of private placements, investment advisers and companies that have never been examined, advisers to private funds, and the conduct of transfer agents.