by T. GormanPosted on Posted in SECActions

Municipal bond offerings have, in recent years, become a staple of SEC enforcement. While the Commission has limited authority in the area, a series of actions have been brought under the fraud provisions. Likewise, the Commission has conducted a very successful initiative which encouraged those involved in the offerings to self-report in return for decreased sanctions.

The Commission’s newest action in this area centers on a key provision in these offerings – the obligation to update the financial information in the offering materials. In the Matter of Lawson Financial Corporation, Adm. Proc. File No. 3-17901 (April 5, 2017).

Respondents in the proceeding are Lawson Financial, a registered broker dealer, and its founder, CEO and CCO, Robert Lawson. Since the firm was founded in 1984 it has conducted over 200 conduit municipal bond offerings. Between 2010 and 2014 the broker-dealer conducted 13 conduit offerings – those where a municipal entity serves as the issuer but the funds raised are passed to another who is obligated for the repayments. Those offerings were for the projects of Christopher Brogdon, who had been building nursing homes, assisted living facilities and retirement housing for twenty-five years using similar offerings.

During the underwriting process for the bonds, the underwriters are required to determine that an issuer or the person obligated has executed a Continuous Disclosure Agreement. That agreement provides that the obligated person on the bonds will provide annually financial information and event notices to the MSRB. That information gives brokers and dealers a reasonable basis on which to recommend the purchase of the bonds. The agreements in the Brogdon offerings were typically between the Bank of Oklahoma and the Brogdon-controlled borrowers.

In connection with the thirteen underwritings conducted during the four year period here Lawson Financial, through Mr. Lawson, and a person identified as Bank A – John T. Lynch, Jr. (see below) – were charged with conducting the appropriate due diligence on Mr. Brogdon and his offerings. They did not. Despite becoming aware of numerous red flags – the brokerage firm had no due diligence check list and virtually no relevant procedures — relating to the failures of the borrowers to comply with their Continuous Disclosure Agreements, the series of offerings continued.

For example, in 2010 the broker underwrote two Brogdon bond offerings. The brokerage firm and Banker A or Mr. Lynch assisted in preparing the draft official preliminary and final official statements. The final official statements included a summary description of the provisions in the Continuous Disclosure Agreement. Despite the fact that the borrower failed to comply with those obligations, the next offerings in the series proceeded with the pattern repeating over the period and throughout the offerings. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Section 15(c).

To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm also consented to the entry of a censure and Mr. Lawson was barred from the securities business with a right to apply for re-entry after three years. Respondents will also, on a joint and several basis, pay disgorgement of $178,750 along with prejudgment interest. The broker will pay a civil penalty of $198,326.06. Mr. Lawson will pay a penalty of $80,000. The Commission may establish a fair fund. See also In the Matter of John T. Lynch, Jr., Adm. Proc. File No. 3-17902 (April 5, 2017)(proceeding naming as Respondent Banker A who supposedly served as underwriter’s counsel during the offerings but in fact was an attorney but not a member of any bar; resolved with a cease and desist order based on Securities Act Sections 17(a)(2) and (3) and Exchange Act Sections 10(b) and 15(c), the payment of disgorgement of $20,000, prejudgment interest of $2,338 and a penalty of $22,338; he is also denied the privilege of appearing or practicing before the Commission as an attorney; further proceedings will be held to determine if a bar from the securities business is appropriate).

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by T. GormanPosted on Posted in SECActions

The Commission has brought a series of settled cases in recent months centered on charges that advisory clients in wrap fee programs were not told the amount of “trading away” fees – additional fees incurred when a non-program broker was used. See, e.g., In the Matter of Stifel, Nicolaus & Co., Inc., Adm. Proc. File No. 3-17897 (March 13, 2017)(failure to disclose amount of trading away fees to wrap fee program clients). The Commission’s most recent action involving an investment adviser and a wrap fee program also focuses on clients being charged additional fees but not from trading away. Rather, the fees came from the selection of mutual fund shares by the adviser that generated a revenue for it to the detriment of the client. In the Matter of Credit Suisse Securities (USA) LLC, Adm. Proc. File No. 3-17899 (April 4, 2017).

Credit Suisse is a registered broker-dealer and investment adviser. From the beginning of 2009 through early 2014 the firm offered investment advisory programs to clients through its adviser representatives or Relationship Managers using a wrap fee program. Under the program the client paid an annual inclusive fee-based on a percentage of assets under management. The program covered investment advice, execution, custody and administrative and account reporting services. To oversee the wrap fee program Credit Suisse created the Discretionary Managed Portfolio program. It covered both discretionary and non-discretionary Accounts.

The Accounts could be invested in an array of securities. Those included Class A and institutional mutual fund shares. The Class A shares can generally be purchased in retail brokerage or advisory accounts and carry sale charges or loads. The sales charges are typically waived if the Class A shares are purchased in a wrap fee account. Those shares also carry 12b-1 fees paid from the fund’s assets for shareholder services, distribution and marketing fees.

Institutional shares, in contrast are only available to certain investors and the fees are typically waived or greatly reduced. They do not carry 12b-1 fees. Over time purchasers of institutional shares will thus achieve higher returns compared to those who acquire Class A shares.

Sanford Katz was a Managing Director and Relationship Manager in the Credit Suisse San Francisco office during the period. After joining the firm Mr. Katz and his team determined that they were not being paid 12b-1 fees – the firm had blocked them. After discussing the matter with supervisors the block was lifted except for ERISA accounts. Subsequently, Mr. Katz and his team purchased Class A shares for the Accounts in the program under circumstances where: the mutual fund prospectus indicated that institutional shares were available for wrap fee accounts; other Credit Suisse relationship managers had purchased institutional shares; and/or he had previously purchased institutional shares for Accounts.

Credit Suisse failed to furnish advisory clients with adequate disclosure about the mutual fund shares available, the fees and the conflicts and to obtain best execution for the Accounts. The firm’s Forms ADV and advisory agreements stated only that it “may” receive 12b-1 fees from the sale of mutual funds which creates a conflict. The disclosure failed to address the selection or recommendation of shares that paid 12b-1 fees when less expensive share classes were available.

The disclosure did state that the firm may receive revenue sharing payments from a fund or its affiliates and the client should inform the relationship manager if he or she did not wish to purchase such shares. The term revenue sharing was not defined but generally is not understood in the industry to apply to 12b-1 fees. Indeed, Credit Suisse failed to disclose the actual conflict present when the shares carried 12b-1 fees and those that did not have such a fee were available. The firm also failed, beginning in 2011, to disclose in Form ADV, Part 2B Item 4 the specifics as to each relationship manager and that certain ones were paid 12b-1 fees, stating only that they did not receive any form of compensation from any person other than the firm. Credit Suisse also failed, in accord with Advisers Act Section 206, to obtain best execution for its Account clients by purchasing Class A shares when institutional shares were available.

Finally, the firm failed to adopt and implement reasonably designed policies and procedures. Specifically, the firm did not have policies and procedures which furnished the Administrative Manager who reviewed the purchases with sufficient information regarding the availability of other, less expense shares. And, the firm failed to discover the issue despite a review in August 2012 by an Investment Advisory Task Force, until OCIE issued a deficiency letter following an examination in 2014.

The Order alleges violations of Advisers Act Sections 206(2), 206(4) and 207. To resolve the matter the firm consented to the entry of a cease and desist order based on the Sections cited in the Order and a censure. It also agreed to pay disgorgement of $2,099,624.12, prejudgment interest and a civil penalty of $3,275,000. A fair fund was created. See also In the Matter of Sanford Michael Katz, Adm. Proc. File No. 3-17900 (April 4, 2017)(settled action against the relationship manager discussed above; resolved with the entry of a cease and desist order based on Advisers Act Section 206(2) and a censure and the payment of disgorgement of $1,124,858.89, prejudgment interest and a penalty of $850,000).

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