SEC Looking at Variable Annuity Contract Provisions

The Securities and Exchange Commission is worried that life insurance companies are taking advantage of vague language in VA contracts to make substantial changes that could hurt investors. It appears that the most recent example from The Hartford Financial Services Group Inc., is what has set this concern in motion. Hartford began applying a series of new restrictions to existing contracts. The most controversial amendment places investment restrictions on existing account balances for a number of contracts. Certain clients with the Lifetime Income Builder rider will need to switch to a number of more conservative investments. These more conservative options include a number of funds that call for a minimum 40% allocation to fixed income. Clients who don't respond by Oct. 4 could have their rider terminated. The SEC is expected to establish standards for the full disclosure of all such conflicts in the contracts. To read the full story, please click here.

Adviser and Principals Charged with Stealing from Public Pension Plan

The SEC filed suit against an Adviser and its five principals which included the Adviser’s General Counsel and Chief Compliance Officer, for stealing money from a public pension plan. According to the SEC, the Adviser managed real estate assets for the Detroit Police and Fire Retirement System. The SEC claims that the Adviser took money from a cash account and purchased two shopping centers in California without obtaining permission from or notifying the plan. The SEC stated that the adviser failed to disclose the purchases for several years despite multiple opportunities to do so (i.e. reporting, Board presentations. The principals of the Adviser did not want to disclose the investment because the properties dropped in value soon after the purchase. The SEC has alleged that the General Counsel and Chief Compliance Officer knew about the unlawful use of funds and assisted in the conspiracy to withhold the information from the pension plan.

One has to wonder whether the DOL will join in prosecuting these principals since their fraud involved ERISA assets. To read the rest of case information, please click here.

FINRA Focused on e-Mail Retention

Last week FINRA fined LPL Financial LLC $7.5 million for e-mail violations. This is the largest fine brought by FINRA solely for e-mail violations, but it is indicative of the regulator's increased focus in this area.

FINRA is concerned and firms will continue to be targets of disciplinary actions for failing to retain and review business-related e-mails, especially where fast growth and increased regulatory requirements overtake stretched compliance resources, legal sources said.

In settling the case against LPL, FINRA said that as the firm “rapidly grew its business, failed to devote sufficient resources to update its e-mail system, which became increasingly complex and unwieldy.” “ Fast-growing firms and systems are always a challenge,” said FINRA enforcement chief Brad Bennett. “Compliance and legal are being asked to do more with the same resources.”

A review of FINRA e-mail cases include nine settlements with broker-dealers year-to-date, not including the LPL case. The total fines amounted to $1.65 million. These cases include Next Financial Group Inc. that agreed in May to pay FINRA a $250,000 fine to settle an e-mail case. Securities America Inc. was fined $100,000 in April, and in February, five broker-dealers owned by ING Groep NV were fined $1.2 million.

A study conducted by the law firm Sutherland Asbill & Brennan LLP found a sharp increase in e-mail-related violations last year. The law firm said FINRA fines shot up to $6.5 million in 2012, an increase of 81% from the prior year. It counted 63 e-mail cases in 2012, up from 57 cases in 2011. Sutherland included all cases where e-mail violations were part of the case, regardless of how minor. To read the full study, please click here.

We know that firms often struggle with the technology used for retaining e-mails, and glitches can occur that compliance officials may not be aware of. Also, individual brokers may fail to inform their broker-dealers about using outside or personal e-mail. Compliance policies and procedures need to take this into account when they are designed and implemented.

Red Oak Compliance Solutions is available to help. We can provide guidance on all of your compliance needs. For more information or to request information on how we can help, please contact us.

Dallas Trader Charged with Front Running

The Securities and Exchange Commission announced fraud charges and an asset freeze this week against a trader at a Dallas-based investment advisory firm, Cushing MLP Asset Management, who improperly profited by placing his own trades before executing large block trades for firm clients that had strong potential to increase the stock's price.

The SEC alleged that Daniel Bergin, a senior equity trader, secretly executed hundreds of trades through his wife's ahead of large client orders. Bergin concealed his lucrative trading by failing to disclose his wife's accounts to the firm and avoiding pre-clearance of his trades in those accounts.

"Bergin's misconduct is particularly egregious because his firm depended on him to manage market exposure and risk for its investments. Instead, he pitted his clients' financial interests against his own," said David R. Woodcock, Director of the SEC's Fort Worth Regional Office.

According to the SEC's complaint, Bergin realized at least $1.7 million in profits in his wife's accounts from 2011 to 2012 as a result of his illegal same-day or front-running trades. More than $520,000 of the $1.7 million represents profits from approximately 132 occasions in which Bergin placed his initial trades in his wife's account ahead of clients' trades.

According to the SEC's complaint, more than $1.8 million was withdrawn since July 2012 from a trading account belonging to Bergin's wife that was undisclosed to his firm. Most of the withdrawals were large transfers to her bank account. To read the full complaint, please click here.

Advertising Fines Continue to Rise

Sutherland Partners reviewed FINRA’s monthly disciplinary notices and found that in 2012 FINRA brought slightly more disciplinary actions but assessed a double-digit increase in fines. This was the fourth consecutive year of increase in the number of cases filed and the second straight year of growth in the amount of fines. Sutherland also identified the top enforcement issues for FINRA in 2012, as well as emerging trends.

Advertising was the fourth-biggest fine generator in 2012. FINRA reported 50 cases involving alleged advertising violations in 2012, which resulted in fines of $10.4 million. This is an 11% increase over 2011. Please click here for the full survey.

With the recent fines to LPL for failure to archive all emails, firms need to ensure that they also capture all advertising and archive it. Red Oak Compliance Solutions has a technology solution, AdMaster to help you with all your advertising review needs. Take that next step to ensure you are covered and can respond appropriately to all regulatory requests. Call us today for a demo of AdMaster.