More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
This news article originally appeared on ResearchMag.com on 3/18/2010.
The Financial Industry Regulatory Authority said that it expelled Provident Asset Management, a Dallas-based broker/dealer, "for marketing a series of fraudulent private placements offered by its affiliate, Provident Royalties, LLC, in a massive Ponzi scheme," the regulatory organization explained in a press release.
The action is the first produced by a FINRA initiative involving active examinations and investigations of broker/dealers in retail sales of private placement interests, as well as broker/dealers affiliated with private placement issuers.
FINRA is looking at firms' compliance with suitability, supervision and advertising rules, as well as potential instances of fraud.
The initiative came in response to an increase in investor complaints involving private placements and Securities and Exchange Commission actions halting sales of certain private placement offerings.
Provident Asset Management misrepresented to investors that the funds raised through the offerings would be used to purchase interests in the oil and gas business, including exploration activity and the acquisition of real estate, oil and gas leases and mineral rights, FINRA says.
In fact, investors' funds were commingled and used by an affiliated issuer to make dividend and principal payments to other investors. In addition, the firm acted as the agent in an oil and gas private placement offering but failed to establish an escrow account for investors' funds during the contingency period of the offering, according to the regulatory group.
"Provident facilitated the sale of a series of  fraudulent private placements that were marketed to unsuspecting customers [from September 2006 to January 2009] as income-producing investments, when it was simply using new investors' money to pay previous investors the promised dividends - a classic Ponzi scheme," said Susan L. Merrill, FINRA executive vice president and chief of enforcement.
"While the private placement market is an important source of capital for many companies, the market is also one in which investors have been subject to unsuitable or abusive sales tactics," explained Merrill.
The offerings were sold to customers through more than 50 retail broker/dealers nationwide, raising over $480 million through about 7,700 individual investments made by thousands of investors. FINRA's broader investigation into broker/dealers that sold the Provident and other troubled private placement offerings is continuing.
The Provident Royalties private placement memoranda promised investors returns of up to 18 percent per year and said the funds raised through each offering would be used to purchase interests in all aspects of the oil and gas business.
In concluding the settlement, Provident Asset Management neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
In other news, FINRA said that Susan Merrill, who has headed enforcement at FINRA and one of its predecessor organizations for more than five years, is stepping down to return to private practice.
Merrill, who became New York Stock Exchange Regulation's enforcement chief in 2004, continued in that role when much of NYSE Regulation merged with NASD in 2007 to form FINRA. Prior to joining NYSE Regulation, she was a partner at the New York law firm of Davis Polk & Wardwell LLP.
Merrill's departure date has yet to be determined and a search for a successor is underway.
The chief of enforcement is responsible for the management of some 300 enforcement staff in 17 offices across the United States.