FINRA Targets Conflicts of Interest
(Aug 2012)
FINRA has announced its intention to conduct a targeted examination (or sweep) of its members' practices relating to the identification and management of conflicts of interest. The importance of this effort cannot be overstated. Conflicts of interest in the securities industry are particularly troublesome because customers usually do not stand in an arm's-length, caveat emptor relationship to their broker. Instead, most customers trust and rely upon their broker's superior knowledge and...
SEC Litigation Releases: Week in Review - August 17th, 2012
(Aug 2012)
SEC Charges Oracle Corporation with FCPA Violations Related to Secret Side Funds in India
August 16, 2012, (Litigation Release No. 22450)
According to the complaint (opens to PDF), the Indian subsidiary of Oracle Corporation, Oracle India Private Limited, "structured transactions with India's government...in a way that enabled Oracle India's distributors to hold approximately $2.2 million of the proceeds in unauthorized side funds." Oracle India's alleged misconduct occurred from 2005 to 2007,...
New Suitability Rules Now in Effect
(Aug 2012)
FINRA was created in 2007 through a combination of the former NASD with the regulatory functions of the NYSE. Since then, FINRA has been attempting to consolidate each entity's old rules into a single manual. Although progress has been slow, recently new suitability rules took effect. This much-needed update (parts of the old rule date back to 1938) brings the suitability rule a little closer to the realities of business in a modern, full-service securities firm; but it is still a far cry...
Overreliance on Credit Ratings Results in Large Losses for Municipalities
(Aug 2012)
Earlier this week, the SEC charged Wells Fargo's brokerage firm with selling complex securities to institutional investors such as municipalities and non-profits. The Institutional Brokerage and Sales Division, between January 2007 and August 2007, made recommendations to institutional clients to purchase asset-backed commercial paper "issued by limited purpose companies called structured investment vehicles (SIVs) and SIV-Lites backed largely by mortgage-backed securities and CDOs." Already...
Poor Incentives and Predatory Lending in Municipal Finance
(Aug 2012)
Last year, Poway Unified School District had a problem. A decade earlier, it had started a program to modernize its aging schools. In 2008, voters had approved additional funding for the project under the condition that the school board could not raise taxes further. Unfortunately, by 2011, the project needed an additional $105 million to complete. But because they could not raise taxes, they could not issue the kind of tax-backed bonds (called general obligation bonds) that usually fund...
SEC Litigation Releases: Week in Review - August 10th, 2012
(Aug 2012)
SEC Charges Participants in $5 Million Boiler Room Scheme
August 10, 2012, (Litigation Release No. 22444)
The SEC charged Edward M. Laborio, Jonathan Fraiman, Matthew K. Lazar, and seven entities controlled by Laborio for their alleged roles in a boiler scheme that ran from December 2006 to August 2009. The seven entities include Envit Capital Group, Inc., Envit Capital, LLC, Envit Capital Holdings, Inc., Envit Capital Private Wealth Management, LLC, Envit Capital Multi Strategy Mixed...
Direxion to Close Several Leveraged ETFs
(Aug 2012)
Direxion Shares ETF Trust announced last week that -- upon recommendation of the trust's advisor Rafferty Asset Management, LLC -- nine daily leveraged and inverse Exchange Traded Funds will be liquidated and shares will no longer be open for purchase as of early next month. From the announcement,
Due to the Funds' inability to attract sufficient investment assets, Rafferty believes they cannot continue to conduct their business and operations in an economically efficient manner. As a result,...
Mutual Fund and ETF Issuers Competing on Fees
(Aug 2012)
In March, we posted a graph of the returns and fees of the 25 largest funds by net assets and called attention to the striking difference in fees between funds offered by the Vanguard Group and those offered by American Funds. While both had very similar 5-year annualized total returns, the Vanguard funds had significantly lower fees.
Today the Wall Street Journal ran an article about how Vanguard's funds have attracted net inflows of $452 billion from January 2008 to June 2012, while...
SEC Litigation Releases: Week in Review - August 3rd, 2012
(Aug 2012)
SEC Settles Litigation with Former Veritas Software Corporation Chief Financial Officer
August 2, 2012, (Litigation Release No. 22432)
On July 20, 2012, a final judgment was entered against Kenneth E. Lonchar in the case SEC v. Mark Leslie, Kenneth E. Lonchar, Paul A. Sallaberry, Michael M. Cully, and Douglas S. Newton. Lonchar, the former Chief Financial Officer of Veritas Software Corporation, had been charged with inflating Veritas' reported revenues "by approximately $20 million in...
ETFs are Finding Their Way into 401(k) Plans
(Aug 2012)
In a recent blog post we discussed how mutual fund fees can drastically reduce funds available for retirement (see "401(k) Fees Can Drastically Reduce Nest Egg"). We cited a paper from the Center for Retirement Research that studied a typical 401(k) plan's investment costs, which including advertising fees, administration fees, asset management fees, and trading costs total 1-2% of assets annually. The paper proposed boosting the returns of 401(k) plans by investing in passively managed and...
