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Representing Individual, High Net Worth & Institutional Investors

Offices in Indiana and New York City


Home > Blog > Monthly Archives: January 2015

Monthly Archives: January 2015


A top economic adviser under President Obama is calling for stricter rules on Wall Street after finding some bad broker practices costing investors $8 billion to $17 billion a year.

Chairman of President Obama’s Council of Economic Advisers, Jason Furman, found research showing some broker practices, such as boosting commissions with excessive trading, is costing investors billions. The White House is considering tighter oversight of brokers who handle retirement accounts.

In a Jan. 13th memo, drafted by Furman to the White House, calls for a Labor Department regulation that would impose a fiduciary duty on brokers handling retirement accounts, requiring them to act in their clients’ best interest. Under current procedures, brokers are held to a ‘suitability’ standard, meaning they must sensibly believe their recommendation is right for a customer.

Over the past four years or so, Wall Street has been lobbying against the Labor rule. Firms such as, Morgan Stanley and Bank of America Corp. have been leading the charge. Arguing that costlier regulations would take away options for smaller investors, who would lose access to advice as well as investment choices.

The Labor Department’s official proposal could come as soon as this month. It is important to note that this draft rule will not ban sales commissions and will require brokers to guard against conflicts and avoid “certain self-dealing transactions”.

For more details about the Jan. 13th memo click here.


Just like an average person who ages, an older financial adviser is more likely to show signs of aging. Red flags that a financial adviser might be suffering from senior moments: forgetfulness, a tendency to repeat things, a disregard for following instructions. If you are concerned, bring attention to the branch manager or to compliance, or, if they don’t do anything, to the authority. An increasing problem that seems to go unreported most of the time, but in the next few decades be prepared to see these declining mental skills claims increase.

51 is the average age of financial advisers and 43 percent are older than 55, according to Cerulli Associates. Many are planning to retire in the next decade and it is a struggle to recruit young advisers to offset those retiring from the industry. The North American Securities Administrators Association are aware of the financial services industry’s continuing concerns regarding the aging of advisers and have begun addressing the issue with proposing a rule requiring state-registered investment advisers to have succession and business continuity plans in place.

SEC Compliance Inspections and Examinations Office Released Examination Priorities for 2015

The Examination priorities for 2015 address issues across a variety of financial institutions, including investment advisers, investment companies, broker-dealers, transfer agents, clearing agencies, and national securities exchanges.  Areas of examination include:

Market-Wide Risks – The SEC will examine for structural risks and trends that involve multiple firms or entire industries, including: monitoring large broker-dealers and asset managers in coordination with their policy divisions, conducting annual examinations of clearing agencies as required by the Dodd-Frank Act, assessing cybersecurity controls across a range of industry participants, and examining broker-dealers’ compliance with best execution duties in routing equity order flow.

Retail Investors – Retail investors are being offered products and services that were formerly characterized as alternative or institutional, including private funds, illiquid investments, and structured products.  Additionally, financial services firms are offering a broad array of information, advice, products, and services to help retail investors plan for and live in retirement.  The SEC will evaluate risks to retail investors that can arise from these trends.

Data Analytics – Significant enhancements have been made that enable exam staff to analyze large amounts of data efficiently and effectively. The SEC will use these capabilities to focus on registrants and registered representatives that appear to be possibly doing illegal activity.

These priorities for 2015 can be adjusted depending on market conditions, industry developments, and ongoing risk assessment activities. To view the actual report see below.



This document identifies selected 2015 examination priorities of the Office of Compliance Inspections and Examinations (“OCIE,” “we” or “our”) of the Securities and Exchange Commission (“SEC” or “Commission”). In general, the priorities reflect certain practices and products that OCIE perceives to present potentially heightened risk to investors and/or the integrity of our capital markets.1

OCIE serves as the “eyes and ears” of the SEC. We conduct examinations of registered entities to promote compliance, prevent fraud, identify risk, and inform policy.2 We selected our 2015 examination priorities in consultation with the five Commissioners, senior staff from the SEC’s eleven regional offices, the SEC’s policy-making and enforcement divisions, the SEC’s Investor Advocate, and our fellow regulators.

This year, our priorities focus on issues involving investment advisers, broker-dealers, and transfer agents and are organized around three thematic areas: 1. Examining matters of importance to retail investors and investors saving for retirement, including whether the information, advice, products, and services being offered is consistent with applicable laws, rules, and regulations; 2. Assessing issues related to market-wide risks; and 3. Using our evolving ability to analyze data to identify and examine registrants that may be engaged in illegal activity, such as excessive trading and penny stock pump-and-dump schemes.

This document does not address OCIE’s examination priorities for exchanges and SROs, which we are addressing separately.

1   This document was prepared by SEC staff, and the views expressed herein are those of OCIE. The Commission has expressed no view on this document’s contents. It is not legal advice; it is not intended to, does not, and may not be relied upon to create any rights, substantive or procedural, enforceable at law by any party in any matter civil or criminal. 2 The registered entities that OCIE examines include investment advisers, investment companies, brokerdealers, exchanges, self-regulatory organizations (“SROs”), clearing agencies, municipal advisors, and transfer agents.


  1. Protecting Retail Investors and Investors Saving for Retirement

Retail investors of all ages face a complex and evolving set of options when determining how to invest their money, including retirement funds. Registrants are developing and offering to retail investors a variety of new products and services that were formerly characterized as alternative or institutional, including private funds, illiquid investments, and structured products intended to generate higher yields in a low-interest rate environment. Additionally, as investors are more dependent than ever on their own investments for retirement,3 the financial services industry is offering a broad array of information, advice, products, and services to retail investors to help them plan for, and live in, their retirement years. We are planning various examination initiatives to assess risks to retail investors that can arise from these trends.

  • Fee Selection and Reverse Churning. Financial professionals serving retail investors are increasingly choosing to operate as an investment adviser or as a dually registered investment adviser/broker-dealer, rather than solely as a broker-dealer. Unlike broker-dealers, which typically charge investors a commission or mark-up on purchases and sales of securities, investment advisers employ a variety of fee structures for the services offered to clients, including fees based on assets under management, hourly fees, performance-based fees, wrap fees, and unified fees. Where an adviser offers a variety of fee arrangements, we will focus on recommendations of account types and whether they are in the best interest of the client at the inception of the arrangement and thereafter, including fees charged, services provided, and disclosures made about such relationships.
  • Sales Practices. We will assess whether registrants are using improper or misleading practices when recommending the movement of retirement assets from employer-sponsored defined contribution plans into other investments and accounts, especially when they pose greater risks and/or charge higher fees.
  • Suitability. We will evaluate registered entities’ recommendations or determinations to invest retirement assets into complex or structured products and higher yield securities, including whether the due diligence conducted, the disclosures made, and the suitability of the recommendations or determinations are consistent with existing legal requirements.
  • Branch Offices. We will focus on registered entities’ supervision of registered representatives and financial adviser representatives in branch offices, including using data

3   For decades, employers have shifted from offering defined benefit pensions to defined contribution plans, such as 401(k) accounts, that place funding and investment risk directly on participants. Today, it is estimated that approximately $15.8 trillion is invested in defined contribution plans (including individual retirement accounts and annuity reserves), while approximately $8.3 trillion is invested in defined benefit plans. See Nari Rhee, “Retirement Savings Crisis: Is it Worse than We Think” (June 2013), a publication of the NATIONAL INSTITUTE ON RETIREMENT SECURITY, available at:; see also “Retirement Assets Total $24 Trillion in Second Quarter 2014” (Sept. 2014), a publication of the INVESTMENT COMPANY INSTITUTE, available at:


analytics to identify branches that may be deviating from compliance practices of the firm’s home office.

  • “Alternative” Investment Companies. Funds holding “alternative” investments, or those offering returns uncorrelated with the stock market, have experienced rapid and significant growth compared to other categories of mutual funds. We will continue to assess funds offering alternative investments and using alternative investment strategies, with a particular focus on: (i) leverage, liquidity, and valuation policies and practices; (ii) factors relevant to the adequacy of the funds’ internal controls, including staffing, funding, and empowerment of boards, compliance personnel, and back-offices; and (iii) the manner in which such funds are marketed to investors.
  • Fixed Income Investment Companies. With interest rates expected to rise at some point in the future, we will review whether mutual funds with significant exposure to interest rate increases have implemented compliance policies and procedures and investment and trading controls sufficient to ensure that their funds’ disclosures are not misleading and that their investments and liquidity profiles are consistent with those disclosures.

III. Assessing Market-Wide Risks

The SEC’s mission includes not only investor protection and capital formation, but also maintaining fair, orderly, and efficient markets. With examination authority over a wide variety of registrants, we intend to examine for structural risks and trends that may involve multiple firms or entire industries. In 2015, we will focus on the following initiatives:

  • Large Firm Monitoring. We will continue to collaborate with our colleagues in the Division of Trading and Markets and the Division of Investment Management to monitor the largest U.S. broker-dealers and asset managers for the purpose of assessing risks at individual firms and maintaining early awareness of developments industry-wide.
  • Clearing Agencies. We will continue to conduct annual examinations of all clearing agencies designated systemically important, pursuant to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Areas for review will be determined through a risk-based approach in collaboration with the Division of Trading and Markets and other regulators, as applicable.
  • Cybersecurity. Last year, we launched an initiative to examine broker-dealers’ and investment advisers’ cybersecurity compliance and controls. In 2015, we will continue these efforts and will expand them to include transfer agents.
  • Potential Equity Order Routing Conflicts. We will assess whether firms are prioritizing trading venues based on payments or credits for order flow in conflict with their best execution duties.


  1. Using Data Analytics to Identify Signals of Potential Illegal Activity

Over the last several years, OCIE has made significant enhancements in data analytics that enable us to efficiently and effectively analyze the data to which we have access. We will use these capabilities to focus on registrants and firms that appear to be potentially engaged in fraudulent and/or other potential illegal activity, including the following examination initiatives:

  • Recidivist Representatives. We will continue to use our analytic capabilities to identify individuals with a track record of misconduct and examine the firms that employ them.
  • Microcap Fraud. We will continue to examine the operations of broker-dealers and transfer agents for activities that indicate they may be engaged in, or aiding and abetting, pump-anddump schemes or market manipulation.
  • Excessive Trading. We will continue to analyze data obtained from clearing brokers to identify and examine introducing brokers and registered representatives that appear to be engaged in excessive trading.
  • Anti-Money Laundering (“AML”). We will continue to examine clearing and introducing broker-dealers’ AML programs, using our analytic capabilities to focus on firms that have not filed suspicious activity reports (“SARs”) or have filed incomplete or late SARs. Additionally, we will conduct examinations of the AML programs of broker-dealers that allow customers to deposit and withdraw cash and/or provide customers direct access to the markets from higher-risk jurisdictions.
  1. Other Initiatives

In addition to examinations related to the themes described above, we expect to allocate examination resources to other priorities, including:

  • Municipal Advisors. We will continue to conduct examinations of newly registered municipal advisors to assess their compliance with recently adopted SEC and Municipal Securities Rulemaking Board rules. This initiative will include industry outreach and education.
  • Proxy Services. We will examine select proxy advisory service firms, including how they make recommendations on proxy voting and how they disclose and mitigate potential conflicts of interest. We will also examine investment advisers’ compliance with their fiduciary duty in voting proxies on behalf of investors.
  • Never-Before-Examined Investment Companies. We will conduct focused, risk-based examinations of selected registered investment company complexes that we have not yet examined.
  • Fees and Expenses in Private Equity. Given the high rate of deficiencies that we have observed among advisers to private equity funds in connection with fees and expenses, we will continue to conduct examinations in this area.


  • Transfer Agents. Transfer agents serve as important gatekeepers to prevent violations of Section 5 of the Securities Act of 1933 and other fraudulent activity. We intend to allocate more resources to examine transfer agents, particularly those that are involved with microcap securities and private offerings.
  1. Conclusion

This description of OCIE priorities is not exhaustive. While we expect to allocate significant resources throughout 2015 to the examination issues described herein, our staff will also conduct examinations focused on risks, issues, and policy matters that arise from market developments, new information learned from examinations or other sources, including tips, complaints, and referrals, and coordination with other regulators.

OCIE welcomes comments and suggestions about how we can better fulfill our mission to promote compliance, prevent fraud, monitor risk, and inform SEC policy. If you suspect or observe activity that may violate the federal securities laws or otherwise operates to harm investors, please notify us at

John Thomas Financial Expelled and CEO Tommy Belesis Barred for Life by FINRA Hearing Panel; ordered to pay over $1M to Customers

FINRA has announced that a hearing panel expelled John Thomas Financial and barred its Chief Executive Officer, Tommy Belesis, from the securities industry. They violations are in connection with the sale of America West Resources, Inc. common stock, including trading ahead of customers’ orders, recordkeeping violations, violating just and equitable principles of trade, and for providing false testimony. The panel ordered has ordered them to pay $1,047,288, plus interest, to customers. In addition, they have been suspended for two years and fined $100,000, and the Chief Compliance Officer Joseph Castellano is suspended for one year and fined $50,000, for harassing and intimidating registered representatives. The panel also found they intimidated and harassed representatives who resigned by filing false Forms U5 indicating that the firm had a reasonable basis for investigating these individuals for serious misconduct, when this was not the case. In addition, the decision noted that Belesis provided false testimony to FINRA.

According to the decision, “Belesis testified that he was ‘not familiar’ with the recordkeeping requirements, and claimed that he was unfamiliar even with the fundamental requirement that the firm preserve order tickets for three years.” The panel noted that it did not find Belesis’ claims of ignorance credible given the length and breadth of his experience in the securities industry, and inferred that “they either concealed or destroyed order tickets.”

The panel dismissed charges alleging fraud, best execution violations, failure to follow customer orders, making misrepresentations to customers and failure to supervise. The ruling resolves charges brought by FINRA’s Department of Enforcement from April 2013. The hearing panel’s decision becomes final after 45 days, unless the panel’s decision is appealed to FINRA’s National Adjudicatory Council (NAC), or is called for review by the NAC.

SEC & FINRA Issue Warning on Leveraged and Inverse ETFs

FINRA and the SEC want to alert individual investors about performance confusion on the objectives of leveraged and inverse ETFs. Investors should be aware that performance of ETFs over a period longer than one day can differ significantly from their stated daily performance objectives.

The best form of investor protection is to clearly understand these types of investments before dishing out your hard earned money. Start by reading the prospectus, which will provide detailed information on the ETFs’ investment objectives, principal investment strategies, risks, and costs. The SEC’s EDGAR system, as well as search engines, can help you locate a specific ETF prospectus. You can also find the prospectuses on the websites of the financial firms that issue a given ETF, as well as through your broker.

Consider pursuing the advice of an investment professional. Work with someone who understands your investment goals and tolerance for risk. Your investment professional should recognize these complex products, be able to explain if or how they fit your personal goals, and be willing to monitor your investment.

As with all investments, it pays to do your own homework. Only invest if you are confident the product can help you meet your investment objectives and you are knowledgeable and comfortable with the risks associated with these specialized ETFs.

Take a look at the alert issued by the SEC for more information and for real-life examples that illustrate how returns on a leveraged or inverse ETFs over longer periods can differ significantly.

Wall Street Banks on America’s Amnesia as Featured in the IBJ

Attorney Mark Maddox wrote the below article for the IBJ that was published over the past weekend.

Do you remember 2008? That’s the year that we learned that the Big Banks engaged in massive bets with their depositors’ money on complicated derivatives that were ultimately backed by thousands of bogus mortgages that should never have been loaned in the first place.

Do you remember what resulted from Wall Street’s big bets going bust? Just a little economic disturbance that we now call the Great Recession of 2008 that caused massive job losses, huge market losses, business closures, and general unhappiness along Main Street that many still feel today.

Do you remember the federal government’s reaction to the Great Recession? It started with a $700 Billion bank bailout that became known as TARP. Since the banks had made crazy bets with depositors’ money on complex and risky derivatives called swaps, the entire banking system was at risk of failing. The federal government had no choice but to step in and shore up the collapsing system with our taxpayer money. Too big to fail was now a reality.

But Congress didn’t stop there. Many Americans believed that whatever caused the Great Recession should not be permitted to happen again. Most of the country seemed to agree that the reckless gambling on Wall Street with depositors’ money should never again be able to threaten the jobs and livelihoods on Main Street.   So in 2010, Dodd-Frank was passed which contained a provision prohibiting banks from using depositors’ funds to speculate on these complex and speculative derivatives. It was still okay if the Banks wanted to use their own money to make these risky bets, but they simply couldn’t use their customers’ funds and put the entire banking system at risk yet again.

Fast forward to 2014, a mere four years after Dodd-Frank was passed and six years since Wall Street marched the world up to the precipice of financial Armageddon. The Dodd-Frank provision prohibiting commercial banks from using depositors’ funds to speculate on risky derivatives was removed as part of the recent Congressional budget bill. Shockingly, Wall Street is once again almost unrestrained to engage in the same sort of conduct that put us all at risk a mere six years ago.

This is unfortunately the way history repeats itself in the world of financial regulation. Inevitably, in order to maximize its profits, Wall Street engages in bad conduct that results in severe harm to the public good. Congress or the SEC cracks down on the bad conduct for a few years. Wall Street then aggressively lobbies the federal government to cause the tougher regulations to be pulled back. Then the whole ugly cycle repeats itself again and again.

I will never accept that one of the federal government’s main priorities is to help Citigroup or JP Morgan achieve greater profits. It should be protecting the interests of all of its citizens. It should be protecting the depositors of our commercial banks from reckless conduct by the banks’ top officers. It should be protecting the American taxpayers from having to bail out “too big to fail” banks from their own speculative bets. And it should have the gumption to criminally prosecute the “too big to jail” Wall Street criminals for their misconduct. Unfortunately, Wall Street has invested so much money in the federal government that it now owns both political parties, and can effectively write its own legislation as it did with the budget bill. We are all at the mercy of the Wall Street titans more so than ever before.

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