SEC Charges Former Investment Banker with J.P. Morgan with Insider Trading

The Securities and Exchange Commission announced this week that they have charged a former investment bank analyst with J.P. Morgan, with illegally tipping his close friend with confidential information about clients involved in impending mergers and acquisitions of technology companies. The SEC also charged his friend and another individual with trading on the inside information.

The SEC alleges that on two separate occasions, one in 2012 and another in 2013, the former investment bank analyst, Ashish Aggarwal, became aware of sensitive, nonpublic information about two acquisition deals from colleagues who were working on them. Aggarwal then tipped his friend and colleague, Shahriyar Bolandian, who traded on the basis of the illegal tips in his own accounts as well as accounts belonging to his father and sister. Bolandian also tipped his friend Kevan Sadigh. Bolandian worked at Sadigh’s e-commerce company, and together they made more than $672,000 in combined profits from the insider trading. The SEC Enforcement Division’s Market Abuse Unit detected the insider trading through trading data analysis tools in its Analysis and Detection Center. Aggarwal had repeatedly communicated with Bolandian, in the days and weeks leading up to public announcements concerning the mergers and acquisitions of the technology companies. Bolandian and Sadigh then purchased the same series of call options in the companies, their trades often executed within hours or even minutes of each other, and typically were 100 percent of the daily trading volume of those option series.

Robert A. Cohen, Acting Co-Chief of the SEC Enforcement Division’s Market Abuse Unit, commented, “We will continue to proactively identify and combat serial insider trading schemes, particularly when it involves industry professionals.” In a parallel action, the U.S. Department of Justice also announced criminal charges against Aggarwal, Bolandian and Sadigh, on August 25, 2015.

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Recent SEC Activities

Are you aware of the recent SEC activity relating to investment advisers? The Securities and Exchange Commission (“SEC”) is now looking into advisory firms’ liquidity risk management in current exams. In addition, the SEC’s Chicago regional office has sent out a sweep aimed at gathering data to determine how advisers are handling liquidity risk and the Boston office recently sent out a sweep to dig into firms’ whistleblower policies.

Knowing what is going on in the SEC exam program nationwide can help firms to be better prepared when their turn comes for an exam. If you have not had an exam recently, it’s a good idea to do a gap analysis or mock audit to make sure you are ready, from that first phone call throughout the entire audit process.

If you need any assistance in preparing for an audit, give us a call. Red Oak is ready and able to help you evaluate your current compliance program.

What to do Before the SEC Comes

The Securities and Exchange Commission (“SEC”) is continuing to focus on their exam initiative. They are working to complete more exams than ever before, especially for those firms that have not been audited before. One best practice that everyone should implement is to create an introductory presentation for the SEC Examiners.

An introductory presentation is your chance to tell the examiners all about your firm, your business model and your compliance program. This can help the examiners understand how your firm operates and focuses them on the key areas to review for your type of firm.

Remember this is not a sales pitch. You are not trying to sell the examiners on becoming clients, you are trying to help them understand there is no fraud or deception at your firm. A PowerPoint is a very effective format for this presentation and your Chief Compliance Officer needs to be present during the meeting. If your chief Compliance Officer is comfortable presenting, let him/her lead this initial meeting.

So put together a PowerPoint now so you are not caught by surprise and under the gun to produce dozens of documents and try to create a compelling presentation. The presentation should include your organizational structure, firm history, all conflicts of interest, your compliance culture, mission statement, client base, services provided, your marketing strategy and risks.

Also remember this presentation is a living document so you need to update it at least semi-annually so that it remains relevant.

Brokers Go Rogue and Sell Unauthorized Private Placements for 14 Years

The Securities and Exchange Commission (“SEC”) has fined and censured a broker-dealer/registered investment adviser $450,000, fined and suspended a supervisor for twelve months for failing to stop two rogue brokers from selling an unauthorized private placement for which they received commissions and barred permanently and fined the two rogue brokers.

According to the SEC, the brokers sold the fund to over 125 clients in a 14-year period using the firm's offices and sent the clients statements from the firm's client reporting system. The SEC faults the firm for failing to adopt reasonable policies and procedures governing the use of its client reporting system and the supervisor for allowing the brokers to select which files to be reviewed every year rather than taking a random sample.

To read the complete Administrative Proceedings Document, please click here.

The regulators are looking at consolidated statements since they are so easy to fabricate. Firms should never allow manual changes to be made to client reporting documents. There should also be base reporting templates that are made available after they have been reviewed by compliance for representatives to use with clients. There are specific disclosures that need to be included on these statements.

Firms also must ensure that supervisors stay in line with the compliance program and follow the firm’s policies and procedures, including those involving selling away. If you have any questions about how your reporting system works or could be improved, please give us a call to discuss.

Rep Barred for Churning

The Financial Industry Regulatory Authority (FINRA) announced today that it has permanently barred Richard Adams, a former registered representative of Caldwell International Securities Corp., from the securities industry for churning customers’ accounts and other securities rule violations. Adams also failed to report a dozen unsatisfied judgments and liens on his U4 Registration Form as required by FINRA rules.

FINRA found that from July 2013 to June 2014, Adams excessively traded and churned the accounts of two customers generating more than $57,000 in commissions. At the same time, the excessive trading activity in these accounts resulted in over $37,000 in customer losses.

Brad Bennett, FINRA’s Executive Vice President and Chief of Enforcement, said, “A key element of retail investor protection is the aggressive pursuit of brokers who churn and excessively trade customer accounts. FINRA has no tolerance for brokers who place commissions ahead of what is suitable and appropriate for their customers.”

In settling this matter, Adams neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA’s BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2014, members of the public used this service to conduct 18.9 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999. Investors may find copies of this disciplinary action as well as other disciplinary documents in FINRA’s Disciplinary Actions Online database. Click here to read the full press release.

While this may be an extreme example it still illustrates why it is prudent to document transactions in client accounts, whether it be through notes from client meetings, calls, or simply showing how a trade is suitable for their current situation.

Additionally, it is extremely important to stay on top of your U4 information. There is a 30 day window to update your U4 for any reportable event. Not sure if something needs to be reported? Let us know, we are here to help.

Social Media and Testimonials

With advances in technology providing access to more information and opinion than ever before, investment advisers (IA) and investment advisory representatives (IAR) must be vigilant in how they use Social Media in their advertising and marketing. Social Media is often used to build relationships and more than ever to let people express their views and opinions. IA’s and IAR’s can easily run afoul of the Security and Exchange Commission’ (SEC) Testimonial Rule 206(4)-1(a)(1). Fortunately, the SEC’s Department of Investment Management issued guidance last year to help us better understand appropriate and inappropriate uses of Social Media.

Rule 206(4)-1(a)(1) states, “[i]t shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business . . . for any investment adviser registered or required to be registered under [the Advisers Act], directly or indirectly, to publish, circulate, or distribute any advertisement which refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service rendered by such investment adviser.”

And while “testimonial” is not defined in the Rule, the SEC staff has consistently interpreted that term to include a “statement of a client’s experience with, or endorsement of, an investment adviser.” Between the Rule itself and the staffs’ interpretation of what a testimonial is, there has been limited ability to include comments by clients about their experience with an IA or IAR in advertising. Recent guidance does indicate that as long as certain conditions are met it may be possible.

Notable changes in the SEC’s position include:

• The publication of an article by an unbiased third party regarding the adviser’s investment performance unless that article includes a statement of a client’s experience with or endorsement of the adviser.
• An advertisement that contains non-investment related commentary regarding an IAR, such as regarding an IAR’s religious affiliation or community service.

When using third party commentary it is important to understand that it must be unbiased and independent of the IA or IAR. As long as the IA or IAR has no ability to affect the commentary or how the public commentary is presented on an independent social media site the testimonial prohibition may not be implicated. It is essential that ALL (unedited) public commentary is made available and updating of new commentary is on a real-time basis. If the IA or IAR drafts or submits commentary or if the IA or IAR has the ability to suppress some or all of a commentary, the testimonial rule would be implicated. Also prohibited would be an IA or IAR compensating a social media user for authoring the commentary.

When referencing commentary on independent Social Media sites in advertising, IA’s and IAR’s can direct the public by stating, “see us on [independent social media site]” to let clients/prospective clients know that they can research public commentary about the IA or IAR but they could not publish any testimonials from the independent Social Media site in their own advertising without implicating the testimonial rule.

For more information (including the use of client lists/photos and fan or community webpages) please see the SEC’s IM Guidance Update #2014-04: GUIDANCE ON THE TESTIMONIAL RULE AND SOCIAL MEDIA

Red Oak stands ready to assist IAs and IARs with all their social media questions.

End of Year Reminder

It may only be the beginning of August, but it’s time to start focusing on the end of year routine all registered investment advisers must endure in order to remain in compliance with the Rules and Regulation under which they operate. The time period of October 1 through December 31 is a busy time for all of us. But that is especially true for the small investment adviser trying to service its clients and keep up with the ever mounting compliance requirements that the regulatory world keeps throwing at them.

In the midst of end of quarter billings, winding up the year-end financials, preparing for the impending tax season, scheduling year end portfolio reviews with clients, watching the markets while also attending a myriad of Halloween parties, working on travel arrangements for the holidays with the significant other, Christmas shopping and attending a host of holiday parties and school holiday events, it is important to remember the small things that are also important to be done. These things include funding your renewal account with FINRA, reviewing your Form ADV Parts 1 and 2 to ensure they are up to date and reviewing the Form U4 to make sure it is up to date.

So make sure you set time aside to go over the ADV’s, review your contracts, take a look at the Form U4 and most importantly, make sure you fund your renewal account with FINRA.