Posts by S Carroll

The North American Securities Administrators Association (NASAA) recently released its Enforcement Report for 2016, an annual publication providing a general overview of the activities of the state securities agencies responsible for the protection of investors who purchase investment advice or securities. Admittedly, the information undercounts many statistics due to differences in fiscal year reporting and a lack of response or underreporting for each survey question posed. However, trends in the 52 U.S. jurisdictions are still apparent in the report.[i]

 

For the first time since NASAA began tracking enforcement statistics, more registered than unregistered individuals and firms were subject to respondent status.[ii] During 2015, state securities regulators conducted 5,000 investigations and brought 2,000 enforcement actions against 2,700 respondents, which often involved more than one individual or company.[iii]

 

Sanctions imposed upon those who were found in violation of securities law ranged from incarceration to monetary relief and bans on trading. The year witnessed a combined 849 years of imprisonment, 410 years of probation, and 23 years of deferred prosecution, as well as $538m paid in restitution and $238m in fines/penalties.[iv] In addition to criminal and monetary repercussions, revocation and disbarment from the industry occurred for more than 250 individuals, while another 475 licenses/registrations were denied, suspended or conditioned.[v]

 

The five most common violations prompting these actions were, in order of frequency: Ponzi Schemes, Real Estate Investment Program Fraud, Oil & Gas Investment Program Fraud, Internet Fraud, and Affinity Fraud.[vi]

 

The NASAA report found that Ponzi scheme victims were often targeted through the internet or for identifiable attributes, such as race or religion. The report also found that vulnerable seniors were disproportionately victims; jurisdictions that reported on seniors found one-third of all investigations related to their victimization.[vii]

 

Prison terms have become more common for those conducting such schemes, such as Derek Nelson, found guilty of selling about $37m in promissory notes for property purchases that never took place. As a consequence, Mr. Nelson received 19 years in prison.[viii]

 

Real estate and oil and gas investment fraud was also a major concern for reporting NASAA members. Some states, such as Colorado, have sought judicial remedy and have secured investor protection by winning the right to have oil and gas interests subject to securities law.[ix]

 

The report clearly states that all fraud has been made easier to accomplish due to the internet, where only basic computer skills allow an individual from anywhere in the world to “enter” the homes of investors. Scott Campbell was sentenced to 20 years in prison for conducting a Ponzi scheme over the internet from Florida. Alabama garnered 18 convictions in an international bank scheme conducted through Craigslist.[x] Affinity frauds, in which an individual purports to be a member of a certain group, are much easier to accomplish given the anonymity of the internet.

 

The industry’s heightened attention to elder abuse has not shielded those responsible for supervision or oversight. Wells Fargo Advisors, LLC and Fulcrum Securities, LLC were ordered to pay $470,000 to investors for their failure to oversee Christopher Cunningham of Virginia, who defrauded elderly clients in a Ponzi scheme. For his part, Cunningham was disbarred and sentenced to 57 months in federal prison.[xi]

 

Attorneys are not immune to abusing their positions in order to perpetrate fraud. According to the report, Michael Kwasnik, an estate planning attorney, used his position of trust to perpetrate a $10m Ponzi scheme against elderly victims in New Jersey. The Court found that he had taken advantage of the attorney-client trust. Earlier in the year, Kwasnik also pled guilty to securities fraud in Delaware, utilizing the client trust account of his law firm to commingle monies from both frauds. Though Mr. Kwasnik received no jail time, he was ordered to repay millions in lost monies, amongst other judgments.[xii]

 

What may be the single worst case of elder victimization presented in NASAA’s annual report was perpetrated by Sean Meadows, owner of a financial planning and asset management firm, Meadows Financial Group LLC (MFG). Meadows perpetrated a $13m Ponzi scheme against 100 individuals, some disabled, poor, or terminally ill. He took the life savings of most, luring them into draining their retirement accounts. Many lost their homes, ability to care for their families, and even pay for cancer treatments.[xiii]

 

Meadows convinced his victims to pull money out of tax-deferred accounts to invest with MFG, promising these transactions would be tax-free rollovers. He then convinced these same individuals to allow him to do their taxes, in order to cover up the scheme. He either filed fraudulent tax returns or filed nothing at all. As a result, in addition to losing retirement savings, many incurred significant tax liabilities. For his crimes, Meadows received 25 years in prison.[xiv]

 

As the NASAA report makes clear, positive steps are being taken by its members to address the fraudulent and criminal activities of some individuals and firms. Laura Posner, NASAA Enforcement Section Chair, believes enhanced regulatory scrutiny is responsible for the increase in action documented by the report.[xv] However, it is still necessary to be on alert for promises that seem too good to be true. If you feel you may have fallen victim, please seek consultation from an attorney immediately.

 

[i] North American Securities Administrators Association (2016) NASAA 2016 Enforcement Report (Based on 2015 Data) [Electronic Format]. Retrieved from: http://nasaa.cdn.s3.amazonaws.com/wp-content/uploads/2016/09/2016-Enforcement-Report-Based-on-2015-Data_online.pdf. (pp. 11)

[ii] Ibid. pp. 5

[iii] Ibid. pp. 2

[iv] Ibid. pp. 3

[v] Ibid. pp. 4

[vi] Ibid. pp. 4

[vii] Ibid. pp. 5

[viii] Ibid. pp. 6-7

[ix] Ibid. pp. 4-5

[x] Ibid. pp. 7

[xi] Ibid. pp. 7

[xii] Ibid. pp. 9

[xiii] Ibid. pp. 9-10

[xiv]Ibid. pp.  9-10

[xv] NASAA Releases Annual Enforcement Report (9.13.2006) [Electronic Format]. Retrieved from: http:nasaa.org/40256/nasaa-releases-annual-enforcement-report-2

The SEC and DOJ brought a slew of cases against IAR’s and RIA’s in the first half of 2015. At least six cases were filed just last month alone. Here is a brief summary of a sampling of those cases.

On January 21, 2015, the SEC filed fraud charges and an asset freeze against a Fort Lauderdale, Florida-based investment advisory firm, its manager, and three related funds in a scheme that raised more than $17 million. The SEC’s complaint filed in federal court in the Southern District of Florida charged Elm Tree Investment Advisors LLC, its founder and manager, Frederic Elm, and Elm Tree Investment Fund LP, Elm Tree “e”Conomy Fund LP, and Elm Tree Motion Opportunity LP. According to the complaint, Elm, formerly known as Frederic Elmaleh, his unregistered investment advisory firm, and the three funds misled investors and used most of the money raised to make Ponzi-like payments to the investors. The complaint alleges that Elm used the funds to buy a $1.75 million home, luxury automobiles, and jewelry, and to cover daily living expenses.

On March 6, 2015, an investment adviser was hit with felony charges alleging that he defrauded clients of more than $1 million while running his own investment firm in Chicago. Philip E. Moriarty II is accused of six counts of wire fraud related to allegations that he defrauded investors of at least $1.1 million while he was the CEO of First Street Capital Partners in Chicago from 2008 to 2010. He’s accused of convincing four investors that they were investing in his businesses through the use of fraudulent documentation, and then spending the funds on personal expenses, including payments to a golf, hunting and fishing club, and $23,000 to a boarding school in New Hampshire.

Late that month, the SEC filed fraud charges against an investment adviser and her New York-based firms accusing them of hiding the poor performance of loan assets in three collateralized loan obligation (CLO) funds they managed. The SEC’s Enforcement Division alleged that Lynn Tilton and her Patriarch Partners firms breached their fiduciary duties and defrauded clients by failing to value assets using the methodology described to investors in offering documents for the CLO funds. Tilton and her firms allegedly have avoided significantly reduced management fees because the valuation methodology described in fund documents would have given investors greater fund management control and earlier principal repayments if collateral loans weren’t performing to a particular standard.

In April, 2015, a former JPMorgan Chase investment adviser was arrested on charges he stole $20 million from customers and spent the funds on unprofitable trading and other personal expenses. Michael Oppenheim allegedly took money from at least seven bank clients in a fraud scheme he operated from March 2011 to March 2015. Oppenheim worked as a JPMorgan investment adviser. He advised approximately 500 clients who collectively kept roughly $89 million in assets under his management, according to a criminal complaint filed by Manhattan federal prosecutors.

Later in April, a former Merrill Lynch and Smith Barney investment adviser already serving a federal prison term for investment fraud pleaded guilty to additional fraud charges in connection with a nearly two-decade-long scheme to defraud clients of hundreds of thousands of dollars. Jane E. O’Brien of Needham, MA, pleaded guilty to three counts of mail fraud, two counts of wire fraud, and two counts of investment adviser fraud. As alleged in the indictment, between 1995 and 2013, O’Brien defrauded several clients for whom she provided investment advisory services. As part of the scheme, O’Brien misappropriated funds entrusted to her through a variety of means, including persuading clients to withdraw money from their bank and brokerage accounts to invest. After gaining control of her clients’ money, however, O’Brien made no such investments. Instead, she used the misappropriated client funds for a variety of improper purposes, including paying personal expenses, paying purported investment returns, or repaying personal loans to other clients. Finally, in order to perpetuate her fraud and conceal it from her clients, O’Brien made false statements and misrepresentations to clients, including by making lulling payments to clients and otherwise providing them with false assurances of their financial security.

On May 15, 2015, Bryan Binkholder of St. Louis was sentenced to 108 months in prison on multiple fraud charges involving his financial planning and investment strategy businesses. In addition to the prison sentence, he was also ordered to pay $3,655,980 in restitution to the victims. According to court documents, Binkholder labeled himself “The Financial Coach” and provided investment and financial planning advice to the public through his affiliated websites and an investment related talk-radio show that aired on local radio stations. In 2008, he developed a real estate investment he termed “hard money lending.” Using his platform as an investment advisor and financial talk show host, Binkholder solicited his clients and others to invest in the hard money lending program. As part of his sales pitch he represented that he had relationships with developers who were not able to secure financing from traditional banks. As part of the hard money lending program, Binkholder told investors that they would invest money with him, and he would act as a bank and provide short term loans to these developers at a high rate of interest which would be shared with the investor. Instead of exclusively making hard money loans as promised, he took in millions of dollars of investor money, made only a small number of hard money loans and caused investors to lose more than $3,000,000.

On May 21, 2015, The Securities and Exchange Commission filed fraud charges against an Atlanta-based investment advisory firm and two executives accused of selling unsuitable investments to pension funds for the city’s police and firefighters and other employees. The SEC’s Enforcement Division alleged that Gray Financial Group, its founder and president Laurence O. Gray, and its co-CEO Robert C. Hubbard IV breached their fiduciary duty by steering these public pension fund clients to invest in an alternative investment fund offered by the firm despite knowing the investments did not comply with state law. Georgia law allows most public pension funds in the state to purchase alternative investment funds, but the investments are subject to certain restrictions that Gray Financial Group’s fund allegedly failed to meet. The SEC alleged that Gray Financial Group collected more than $1.7 million in fees from the pension fund clients as a result of the improper investments.

On June 3, 2015, the SEC filed two cases against purported investment advisers who falsified their credentials. In one case, the SEC charged that Todd M. Schoenberger of Delaware solicited at least a dozen people to invest in promissory notes issued by LandColt Capital, an unregistered advisory firm. According to the SEC, he said the notes would be repaid from management fees. Just a few days later, a Chicago investment adviser was arrested on federal charges that he defrauded his clients of at least $1 million, some of which he allegedly gambled away at local casinos. Alan Gold was charged in a criminal complaint that was unsealed following his arrest.

On June 11, 2015, the United States Attorney for the Western District of Wisconsin announced the unsealing of a 21-count indictment charging Pamela Hass with wire fraud and money laundering. The indictment also contains a forfeiture allegation seeking $460,831.27 in criminal proceeds. The indictment alleges that Hass engaged in a wire fraud scheme to defraud investors by promising returns from an investment in internet pop-up ads. According to the indictment, Hass falsely told investors they would obtain a return of anywhere from five to 20 times their original investment, and that if the investment failed, she would personally guarantee the return of the original investment plus 7 percent interest.

Also last month, The Securities and Exchange Commission announced fraud charges against a Washington D.C.-based investment advisory firm’s former president accused of stealing client funds. The firm and its chief compliance officer separately agreed to settle charges that they were responsible for compliance failures and other violations. SFX Financial Advisory Management Enterprises is wholly-owned by Live Nation Entertainment and specializes in providing advisory and financial management services to current and former professional athletes. The SEC alleged that SFX’s former president Brian J. Ourand misused his discretionary authority and control over the accounts of several clients to steal approximately $670,000 over a five-year period by writing checks to himself and initiating wires from client accounts for his own benefit.

Just a day later, Kenneth Graves, a former investment adviser representative in Corpus Christi whose license to sell securities was revoked last year by the Texas Securities Commissioner, was indicted on fraud charges related to the sale of investment contracts and excessive fees for his firm’s services. The indictmentalleges that Graves defrauded six clients of his firm, Warren Financial Services LLC, through the sale of $420,720 in investment contracts. The indictment alleges that in a separate fraud in 2013 and 2014, Graves misapplied $128,918 in fees he had collected from clients of Warren Financial.

Finally, on June 17, 2015, the SEC announced fraud charges against a Massachusetts-based investment advisory firm and its owner for funneling more than $17 million in client assets into four financially troubled Canadian penny stock companies in which the owner had an undisclosed financial interest. The SEC alleged that clients at Interinvest Corporation may have lost as much as $12 million of their $17 million investment based on the recent trading history of shares in the penny stock companies, some of which were purportedly in the business of exploring for gold or other minerals. Interinvest’s owner and president Hans Black served on the board of directors of these companies, which have collectively paid an entity he controls approximately $1.7 million. Black’s involvement with these companies and his receipt of payments from them created a conflict of interest that he and Interinvest failed to disclose to their advisory clients.

On a final note–Investors and accountants should take the time to read Brian Carroll’s article regarding investment advisory fraud in the Journal of Accounting.

In addition to founding the Investment Adviser Rep Syndicate, David Cosgrove, a former regulator and prosecutor, is the founding Member and Manager of Cosgrove Law Group, LLC. The law firm represents both investors and investment advisers across the nation. In doing so, the firm’s members have a unique strategic advantage and insight when it comes to litigation or conflict resolution in the financial services and investment arena.

November, 2014 – Cosgrove Law Group, LLC recently settled a federal breach of fiduciary case on behalf of one of its broker clients.  The settlement included a payment of over $600,000 to the broker.  The broker sued an attorney that his former broker-dealer hired to represent him in a state securities investigation.  That same attorney proceeded to defend the broker-dealer against the broker’s tortious interference claim in a FINRA arbitration that dealt directly with the subject matter of the prior investigation.  The parties to the settlement are and will remain confidential.

December, 2014 – Within 48 months of collecting a $3.3 million dollar U-5 defamation Award in Louisville, KY, David B. Cosgrove of Cosgrove Law Group, LLC netted a $600,000 Award in Baltimore, MD.  Beyond the compensation, the Award included full expungement for three different defamatory disclosures on U-5 and U-4 filings.  The Cosgrove Law group team traveled to Baltimore and Washington, D.C. for three different sessions on behalf of a former Raymond James Financial broker. Raymond James’ final pre-hearing offer was only $75,000.  According to the broker: “My business attorney suggested that I reach out to Mr. Cosgrove because he felt my case needed someone who truly specialized in the financial industry and matters involving former broker-dealers.  We were thrilled with the outcome and feel it was a complete victory and success…and we attribute much of that success to Mr. Cosgrove and his team. Thanks to Mr. Cosgrove and his team, the outcome was more than we could ever dream of.”

According to a variety of authorities including the SEC, the much-debated fiduciary duty for registered investment advisers and their representatives includes a subset of responsibilities[1].  Common sense would, or should tell you that the appropriate damage calculation for a breach of fiduciary duty will be directly dependent upon and vary according to the particular unfulfilled responsibility.  For example, a breach of the fiduciary duty regarding conflicts of interest or honesty, as opposed to mere suitability, will call for out-of-pocket damage compensation if these breaches occurred before any market-losses at issue.  Even in a suitability only arbitration, however, expert witnesses may debate the applicability of out-of-pocket loss calculations as opposed to model portfolio based market-adjusted damage calculations.

It is common in breach of fiduciary duty cases involving trustees to award damages in the amount necessary to make the beneficiary whole. Restatement of Trusts, Second, § 2205, (1957), provides that proof of harm from a breach of fiduciary duty entitles an injured party to whom the duty was owed to damages that: (a) place the injured party in the same position it would have been in but for the fiduciary breach;(b) place the non-breaching party in the position the party was in before the breach; and (c) equal any profit the breaching fiduciary made as a result of committing the breach. See also Restatement (Second) of Torts § 874 (1979) (“One standing in a fiduciary relation with another is subject to liability to the other for harm resulting from a breach of duty imposed by the relation.”).

Delaware law is consistent with this principle. In Hogg v. Walker, 622 A.2d 648, 653 (Del. 1993), the court noted that “where it is necessary to make the successful plaintiff whole” for a breach of fiduciary duty, courts have been willing to allow the plaintiff to recover a portion of trust property or its proceeds along with a money judgment for the remainder. The court in Hogg stated that “[i]t is an established principle of law in Delaware that a surcharge is properly imposed to compensate the trust beneficiaries for monetary losses due to a trustee’s lack of care in the performance of his or her fiduciary duties.” Id. at 654.[2]; see also Weinberger v. UOP, Inc., 457 A.2d 701, 714 (Del. 1983) (stating that in measuring damages for breach of fiduciary duty the court has complete power “to fashion any form of equitable and monetary relief as may be appropriate, including rescissory damages.”); Harman v. Masoneilan Intern., Inc., 442 A.2d 487, 500 (Del. 1982) (finding that “the relief available in equity for tortious conduct by one standing in a fiduciary relation with another is necessarily broad and flexible.”) (citing See Restatement (Second) of Torts, § 874 (1979)).

In O’Malley v. Boris, 742 A.2d 845, 849 (Del. 1999), the court stated that the relationship between a customer and stock broker is that of principal and agent. The court stated a broker must act in the customer’s best interests and must refrain from self-dealing, and that these obligations are at times described “as fiduciary duties of good faith, fair dealing, and loyalty.” (emphasis added) Id. The court further found that fiduciary duties of investment advisors “are comparable to the fiduciary duties of corporate directors, and are limited only by the scope of the agency.” Id.   Bear, Stearns & Co. v. Buehler, 432 F.Supp.2d 1024, 1027 (C.D.Cal. 2000) (finding that reasoning from case addressing breach of fiduciary duty by a trustee was persuasive in case involving investment advisor because, “[l]ike a trustee, an investment advisor may be considered a fiduciary.”).

In sum, it is critical to identify the particular duty at issue in order to arrive at a proper damage calculation.  The broker’s duty of suitability is essentially a limited duty of care akin to the one at play in a negligence matter. The fiduciary duty, however, carries within it an entire penumbra of duties of which portfolio/investment suitability is just one.  If an alleged breach of fiduciary duty is limited to the adviser’s responsibility to recommend or make a suitable investment only, the damage calculations may indeed mirror the broker-dealer damage calculation.  An adviser’s breach of its fiduciary duty beyond the mere standard of investment care, however, requires the finder-of-fact to calculate “make-whole” damages.

______________________________________________________________________________________________

[1]Miley v. Openheimer, 637 F.3d 318 (1981) is “the seminal case on damages in a suitability case[.]”

[2] A “surcharge” is relief in the form of monetary compensation for a loss resulting from a trustee’s breach of duty. The Supreme Court in CIGNA Corp. v. Amara, 131 S.Ct. 1866, 1880 (2011), stated that an ERISA fiduciary can be “surcharged” or ordered to pay money damages under the ERISA provision allowing a participant or beneficiary of the plan to obtain “other appropriate equitable relief.” In making this determination, the court stated that “[t]he surcharge remedy extended to a breach of trust committed by a fiduciary encompassing any violation of a duty imposed upon that fiduciary.” The court went on to conclude that “insofar as an award of make-whole relief is concerned, the fact that the defendant in this case, . . . , is analogous to a trustee makes a critical difference.”

Broker-Dealer agents and Investment Adviser Representatives frequently sign a host of legal documents when they join up with a B/D or RIA. Such documents may include:

  1. Independent Contractor Agreements
  2. Promissory Notes
  3. Stock Participation Plans
  4. Compliance Procedures Manuals

Unfortunately, Agents and Representatives, in my experience, sign these documents without much thought and almost always without the benefit of legal counsel.

When an Agent and a B/D or a Representative and an RIA decide to part ways, something akin to a divorce proceeding is often on the horizon.  Both sides often feel justified in taking impulsive actions that may have various legal consequences.  It is on this battlefield, either during or after the war, that our attorneys spend many of their days.  The file cabinets are flush with U-5 and promissory note matters.  Every now and then, however, an individual will call us on the eve of, rather than in the midst of or the aftermath of the fray.  This person’s foresight almost always pays in cost effective dividends.

Admittedly, legal counsel’s ability to satisfy the goals of the client are frequently limited by legally binding documents signed during the courtship or in the heat of the honeymoon.  Regardless, legal counsel may assist in navigating the choppy waters of a transition.  Impulsive actions in the areas of recruiting or even sabotage can be counseled against from a cool and objective perspective.  U-5 language, payment plans, and stock payouts can be negotiated.

If the transition is of the kind that will generate a regulatory inquiry, legal counsel will be able to familiarize themselves with the facts of the matter before the letter of inquiry arrives.

In sum, if you anticipate transition conflicts, or are even contemplating changing horses; seek out legal counsel.  If you are already midstream, seek faster.

Missouri has adopted Section 551 of the Restatement (Second) Torts, which makes clear that under some circumstances a person’s failure to disclose information constitutes a positive misrepresentation.  Kesselring v. St. Louis Group, Inc., 74 S.W.3d 809, 814 (Mo.App. E.D.,2002).  But the Missouri Court of Appeals has made clear that non-disclosure amounts to a misrepresentation only when the person is under a duty to disclose.  Id.  The Restatement identifies five circumstances under which persons in a business transaction have a duty to disclose:

One party to a business transaction is under a duty to exercise reasonable care to disclose to the other before the transaction is consummated:

(a) matters known to him that the other is entitled to know because of a fiduciary or other similar relation of trust and confidence between them; and

(b) matters known to him that he knows to be necessary to prevent his partial or ambiguous statement of the facts from being misleading; and

(c) subsequently acquired information that he knows will make untrue or misleading a previous representation that when made was true or believed to be so; and

(d) the falsity of a representation not made with the expectation that it would be acted upon, if he subsequently learns that the other is about to act in reliance upon it in a transaction with him; and

(e) facts basic to the transaction, if he knows that the other is about to enter into it under a mistake as to them, and that the other, because of the relationship between them, the customs of the trade or other objective circumstances, would reasonably expect a disclosure of those facts.

Id.

In Kesselring, the buyers of a business argued that the brokers for the business provided all relevant financial documents prior to the purchase of the business except for the “December 1999 Balance Sheet” and the “1999 Moneys Owed.”  Id.  These documents would have disclosed $93,861.32 in outstanding expenses from 1999.  Id.  The buyers claimed this partial disclosure of information created a duty to make a complete disclosure.  The brokers claimed they were under no duty to disclose the documents.

The court of appeals agreed with buyers. Specifically, the court found that “if the brokers gave the buyers the impression that their files contained all relevant business documents, they had a duty to disclose all relevant documents.”  Id.  Although not expressly stated by the court of appeals, they presumably relied upon Section 551(b) or (e), because the duty disclose was premised on the fact that only partial financial information had been provided by the brokers while assuring the buyers, at least implicitly, that all relevant financial information had been disclosed.

This holding from Kesselring could be applied as the basis for a cause of action in any number of situations where partial or non-disclosure is misleading, whether it be a broker or seller of a business, or a broker or seller of investments.  The attorneys at Cosgrove Law Group, LLC, have experience with claims based on non-disclosure of material information in commercial transactions.  Contact us for more information.

Have you pondered why your employer chose the particular 401k platform with which you are saving for retirement? Your employer has a fiduciary duty to ensure that you are provided with a 401k product that offers you a reasonable opportunity to achieve retirement income security – you just need to fund it adequately!

We all have various duties, but it’s important to understand that your employer’s fiduciary duties are mandated by the Employee Retirement Income Security Act (ERISA). Fiduciary duties have been described as “the highest known to the law” and the individuals responsible for choosing your 401k platform can be held personally liable for any fees that are deemed to be unreasonable.  See Donovan v. Bierwirth, 680 F.2d 263 (2nd Cir. 1982) In fact the individual employees who served on the ABB, Inc. pension and benefits committee were recently found jointly liable, along with ABB, Inc., for $35.2 million because they failed to properly document and monitor 401k fees!

Despite the complexity of fiduciary duties, there is no mandatory training for fiduciaries. However, ERISA requires that if an employer doesn’t have the expertise to fulfill the highest duties known to the law, they must engage a qualified, independent expert – and here is where fiduciariness comes into play.

Truthiness, Fiduciariness and Lemoniness

Stephen Colbert coined the term truthiness which is defined by Miriam-Webster as “the quality of preferring concepts or facts one wishes to be true, rather than concepts or facts known to be true.”  In an excellent blog post Chuck Humphrey, Employee Benefits & ERISA Counsel for Fiduciary Plan Governance, LLC. applies truthiness to the 401k industry.

Humphrey is more direct than Colbert writing that “truthiness is a clever way of characterizing what is in fact lying…” and coins the word fiduciariness which more accurately describes the practices of some 401k plan vendors. He defines fiduciariness as “the selling by the financial service industry the concept or fact of assumption of fiduciary status to 401(k) plan sponsors who want it to be true, rather than it actually being true.” There are many employers who are, unknowingly, the victims of fiduciariness. They might have thought they engaged a qualified, independent expert when in fact they only hired a well-trained salesperson whose company rejects any fiduciary responsibility whatsoever.  To learn more about fiduciariness see The Wizard of Oz, Retirement Plans & You.

If your employer is the victim of fiduciariness, then unfortunately so are you. This is because those 401k vendors who practice fiduciariness, often sell what might be considered fiduciary lemons. Scott Wooley aptly describes these products in Retirement Plans from Hell . Simply, these are 401k products fraught with hidden, hard-to-find fees that pilfer away your 401k assets as well as your prospects of retiring with dignity. Just as truthiness is a euphemism for lying, pilfer is a euphemism for stealing – how else might one describe continuously taking small amounts of your 401k assets without your knowledge and consent?

If the Food & Drug Administration was responsible for regulating the 401k industry, these products might come with a warning label which read: This 401k product may be harmful to your retirement income security! However, there is no government agency responsible for regulating the marketing materials and representations of 401k vendors. Ironically, the regulator responsible for punishingfiduciariness is a private corporation, bought and paid for by Wall Street, and accurately described by Madoff whistleblower Harry Markopolos as a “very corrupt self-regulatory organization.”

Regrettably, lemoniness comes in too many varieties to discuss here; however, there is something that you can do. As of 2012, your employer must provide you with what is known as a Rule 404(a)(5) fee disclosure. Ensure you read it and if it isn’t clear to you exactly how much your 401k plan is costing you, demand an explanation from your employer who in turn should demand an explanation from your 401k vendor.  To learn more about how some 401k vendors intentionally hide how they pilfer your money See Rule 408(b)(2): The New Fiduciary Paradox .  If you don’t motivate your employer, no one else will and it’s your retirement income security that is at risk!

About the Author

Mark Mensack

 Mark Mensack, AIFA®, GFS® is the Principal of Mark D. Mensack, LLC., an independent fiduciary consulting practice affiliated with Fiduciary Plan Governance, LLC.. His expertise is in the area of fiduciary best practices, 401k hidden fees and ethical issues in the retirement plan marketplace. He has eighteen years of financial services experience; fourteen as a financial advisor with broker-dealers, and four as an RIA. Mark has a Masters in Philosophy from the University of Pennsylvania and is a former US Army Officer. His final active duty assignment was on the faculty of the United States Military Academy at West Point, NY where he taught Philosophy, Ethics & Critical Reasoning. Mark also writes the 401k Ethicist column for the Journal of Compensation & Benefits and some of his work can be found at www.PrudentChampion.com. Mark welcomes examples of ethical issues in the retirement plan space, and especially misleading 401k marketing materials at 401kEthicist@PrudentChampion.com.

To learn more about Mark Mensack, visit his sites  www.prudentchampion.com and www.fiduciaryplangovernance.com.

Industry Experts Form The Investment Adviser Rep Syndicate
Grass Roots Organization Helps Investment Adviser Representatives

PR Newswire
ST. LOUIS, March 18, 2014
ST. LOUIS, March 18, 2014 /PRNewswire/ — The Investment Adviser Rep Syndicate (The Syndicate) is a new and unique collaborative grass roots organization dedicated to the interests of investment adviser representatives. This national organization was formed to address the compliance, legal, and business development interests of Investment Adviser Representatives (IARs) and small- to mid-size Registered Investment Advisers (RIAs). The Syndicate provides financial advisers and RIAs with a member-driven platform to provide the most effective tools for its members. The Syndicate also provides education and information on regulatory compliance and business development.

“There was a missing link for Investment Adviser Representatives,” commented David B. Cosgrove when asked about why he founded this new organization. “The Investment Adviser Rep Syndicate helps IARs become even better financial advisers by providing them with the resources they need to take their business to the next level.”

The Syndicate was founded in 2013 by David B. Cosgrove, Managing Member of Cosgrove Law Group, LLC and former securities industry regulator. Based in St. Louis, MO, the Cosgrove Law Group represents various individuals and entities in the financial services industry throughout the United States. Mr. Cosgrove serves as President of The Syndicate. Other officers include: Kurt J. Schafers, Vice-President and an attorney representing investment advisers; Mary E. Hodges, Secretary; and Sheila R. Carroll, Treasurer and former securities industry regulator.

Membership fees in The Syndicate are temporarily discounted until April 1, 2014 and include:

Access to The Syndicate’s valuable online chat forum where members can chat with other members and Syndicate staff
Access to discounted legal services, if needed, through Cosgrove Law Group, LLC
E-mail updates, including relevant articles and updates for industry professionals
Special pricing for event registration
Early bird invitations to events
Access to member-only events
Referral reward (Refer 10 people who are approved for membership and your annual
membership will be at no cost)
Annual Membership = $245 Biannual Membership = $465

To apply for membership, please complete the membership application form on The Syndicate’s website. Payment is accepted via check and through PayPal. To register for a conference or for any membership or conference questions, please e-mail The Syndicate at: IARS@investmentadviserrepsyndicate.com.

Follow The Syndicate on Twitter @IARSyndicate and on Linkedln.

Read more news from The Investment Adviser Rep Syndicate.

FOR MORE INFORMATION: David Cosgrove
IARS@InvestmentAdviserRepSyndicate.com
(314) 563-2499

SOURCE Investment Adviser Rep Syndicate

Being a fiduciary to clients means acting in the client’s best interest and putting their interest before yours and others. Sometimes knowing what is in the client’s best interest can get foggy so establishing certain guidelines can help protect you, your client, and your representatives.
In accordance with Rule 204A-1 of the Investment Advisers Act of 1940, RIA’s registered with the SEC are required to maintain a written code of ethics that outline the fiduciary duties and standards of conduct of the RIA and its representatives. State registered RIA’s may also be required to develop a code of ethics consistent with state regulations.
It’s important to keep in mind that in creating a code of ethics, the SEC and various state regulations set minimum requirements.  The following items are required in an RIA’s code of ethics under Rule 204A-1:
  • A standard of business conduct which reflects the fiduciary obligations to clients;
  • Provisions requiring all advisers’ and supervised persons’ compliance with applicable federal securities laws;
  • Protection of material non-public information of both the adviser’s securities recommendations, and client securities holdings and transactions;
  • Periodic reporting and reviewing of access persons’ personal securities transactions and holdings;
  • Adviser’s approval before an access person can invest in an IPO or private placement;
  • Duty to report violations of the code of ethics;
  •  A written acknowledgment that all supervised persons received the code of ethics; and
  • Recordkeeping provisions.
RIAs often set higher standards that work to reinforce the values or business practices of the company.  Rule 204A-1 does not require detailed measures to be included into every code because of the vast differences among advisory firms.  However, the SEC has offered guidance and recommendations on additional best practices that advisors should consider incorporating into its code of ethics.  The following list contains additional safeguards that are commonly implemented by other advisers:
  • Prior written approval before access persons can place a personal securities transaction (“pre-clearance”);
  • Maintenance of lists of issuers of securities that the advisory firm is analyzing or recommending for client transactions, and prohibitions on personal trading in securities of those issuers;
  • Maintenance of “restricted lists” of issuers about which the advisory firm has inside information, and prohibitions on any trading (personal or for clients) in securities of those issuers;
  • “Blackout periods” when client securities trades are being placed or recommendations are being made and access persons are not permitted to place personal securities transactions.
  • Reminders that investment opportunities must be offered first to clients before the adviser or its employees may act on them, and procedures to implement this principle.
  • Prohibitions or restrictions on “short-swing” trading and market timing.
  • Requirements to trade only through certain brokers, or limitations on the number of brokerage accounts permitted;
  • Requirements to provide the adviser with duplicate trade confirmations and account statements; and
  • Procedures for assigning new securities analyses to employees whose personal holdings do not present apparent conflicts of interest.
Another issue that may be important to include in your code of ethics is provisions concerning gifts and entertainment since giving or receiving gifts between a client and adviser may create the appearance of impropriety.  Gift and entertainment provisions usually contain reporting requirements and a prohibition of accepting gifts over de minimus values, such as $100.
While the above requirements and recommendations generally encompass an adviser’s fiduciary duty as it relates to conflicts of interests, advisers have additional fiduciary duties to clients that should be memorialized in a code of ethics as well.  For example, and what might appear obvious to some, advisers cannot defraud or engage in manipulative practices with a client in any way.  Advisers also have a duty to have a reasonable, independent basis for the investment advice provided to a client and to ensure that investment advice meets the client’s individual objectives, needs, and circumstances.  Advisers are also expected to stay abreast of market conditions.  Clients should be provided with all material information related to their investments or investment strategy and should be adequately informed of the risks associated with those investments.  The depth of the explanation of those risks or strategy depends on the client’s level education and experience.
The buck doesn’t stop with establishing a written code of ethics, however.  Implementation and enforcement of your code of ethics are just as crucial.  This also includes educating your representatives.  Rule 204A-1 does not mandate specific training procedures but ensuring that your representatives understand their obligations and their fiduciary duties is imperative.  Thus, periodic training with new and existing employees is not only in your best interest, but also the interest of your employees and clients.  Finally, you should annually review your code of ethics to determine if there are any areas of deficiency or whether changes need to be made.

The Syndicate can assist with your firm in the following ways: (1) drafting or establishing a code of ethics; (2) reviewing your current code to assure it complies with applicable state or federal laws; (3) implementing training programs; and (4) analyzing your firm’s implementation procedures to ensure compliance with the codes provisions.

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