On May 22, 2012 the SEC announced the filing of a complaint in Federal District Court in the Southern District of Florida alleging violations of federal securities laws by two Fort Lauderdale residents – George Levin and Frank Preve. The SEC alleges that Levin and Preve raised over $157 million from 173 investors in less than two years by issuing promissory notes from Levin’s company and interests in a private investment fund they created in 2009. The funds were used to purchase bogus legal settlements from a former prominent Florida attorney, Scott Rothstein, who used investor funds to make payments due other investors and is currently serving a 50-year prison term as a result. The SEC’s complaint notes that Levin and Preve’s fund, Banyon Income Fund, was the largest source of capital for Rothstein’s Ponzi scheme.

Enhancements to make FINRA’s BrokerCheck and Investment Advisor Public Disclosure (IAPD) systems more user-friendly went live last week. FINRA’s press release announcing the changes notes that they were implemented to ease investors’ access to information concerning brokers, investment advisers and their firms. Many of the improvements address recommendations from a 2011 SEC report, mandated by Dodd-Frank, which outlined ways to improve investor access to information about financial professionals. Through the updated system, investors can now:

Earlier this month Reuters issued a special report detailing confidential documents from investigations by two U.S. Attorney offices into violations by HSBC of the Bank Secrecy Act and other anti-money laundering laws.

On Wednesday, New York’s highest court rejected a claim by the former Chief Compliance Officer of Peconic Partners, LLC – a New York based hedge fund – that he was wrongfully terminated for confronting the fund’s majority owner, CEO and President, William Harnisch, for front-running. Sullivan v. Harnisch, et al., No. 82, NYLJ 1202552974182, at *1 (Ct. of App., Decided May 8, 2012). The complaint filed by the CCO, Joseph Sullivan, alleges he was terminated within days of objecting to sales by Harnisch in his personal account and the accounts of his family members in Potash Corp. (POT) the day before selling shares of the stock in the hedge fund’s accounts. The court noted that Sullivan, as CCO, had a duty to ensure that Peconic followed its legal and ethical obligation under state and federal securities laws, as well as its own Code of Ethics, to avoid such conduct. Notably, the court found that those “legal and ethical duties of a securities firm and its compliance officer [do not justify the recognition] of a cause of action for damages when the compliance officer is fired for objecting to misconduct.” An important factor in the reaching this decision seemed to be the fact that Sullivan was not a full-time compliance officer; rather, he held four other titles at the firm, including Executive Vice President and Chief Operating Officer.

The prohibited transaction provisions of ERISA limit arrangements and payments to service providers to ERISA-covered retirement plans, including investment advisers, which may involve conflicts of interest with respect to the use of plan assets. An exemption from the prohibited transaction limitation is available, however, for the use of ERISA plan assets to pay reasonable compensation for services. In order to provide plan sponsors with the ability to effectively determine what constitutes reasonable compensation, the Department of Labor (“DOL”) issued proposed regulations in December, 2007 that require service providers to provide specific disclosures to plan sponsors. After an interim final release in July 2010, final regulations were issued on February 2, 2012 establishing July 1, 2012 as the deadline for initial, required disclosures by plan service providers.

FINRA announced this week it is requesting comment on proposed express procedures that would permit registered representatives who are the “subject of” allegations of sales practice violations made in arbitration claims (but are not named as actual parties to the arbitration) to seek expungement. So-called “subject of” allegations are reported to FINRA’s Central Registration Depository (“CRD”) system on Forms U4 and U5 in the same way that customer complaints are reported.

In January 2010, the SEC established a formal program to encourage and reward individuals who cooperate with the agency in its enforcement investigations and litigation. On March 19, the SEC’s Enforcement Director, Robert Khuzami, issued a public statement touting the importance of the initiative and its successful use in two related enforcement actions settled in 2011. Khuzami credited the cooperation of a “senior executive” with facilitating the recovery of $217 million to victims and additional penalties of $27.5 million against AXA Rosenberg and Barr M. Rosenberg related to non-disclosed errors in the firm’s quantitative investment process. Relatedly, SEC Chairman Mary Shapiro recently praised the Commission’s whistleblower program for “producing higher quality leads and shortening the length of investigations.”

In 2011, FINRA reported 1,488 disciplinary actions, up from 1,310 in 2010. Also significant, fines in 2011 jumped 51% in 2011, up from $45 million in 2010 to $68 million last year. 2011 fines, however, were far lower than the recent high water marks of $184 and $1111 fined by FINRA in 2005 and 2006, respectively. The number of individuals barred by FINRA also increased significantly in 2011, from 288 in 2010 to 329 in 2011, constituting an increase of more than 14%.

As the baby boomer generation careens towards retirement, many owners of investment advisory firms are thinking about succession planning for the first time. If you are among this group, it is never too early to begin the process of preparing for your eventual exit from the business.

On February 15, 2012, the SEC announced the final adoption of amendments to Rule 205-3 of the Investment Advisers Act of 1940 (“Advisers Act”). The amendment results from the Dodd-Frank Wall Street Reform and Consumer Protection Act’s change to section 205 of the Advisers Act, which requires the SEC to make inflationary adjustments to any dollar amount thresholds used to exempt investors from the provision’s prohibition on registered investment advisers collection of performance based fees.