Tags: sec

The SEC's internal investigator has determined that the regulator's $500 million lease of vast amounts of unneeded office space was only the latest blunder in a litany of bad real estate choices.

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According to a new report from SEC inspector general David Kotz's office, committing to rent an extra 900,000 square feet of prime Washington office space "represents another in a long history of missteps and misguided leasing decisions."

Page after page, Kotz and his team blast "yes men," "grandiose plans," "wastefulness," and even "wild-ass guesswork" at the regulator. For those looking for reasons to hate the SEC's bureaucratic culture -- or those looking for insight into why others hate that culture -- the report is a gold mine.

The SEC rushed the move when it looked like Dodd-Frank would open up the funding to expand the commission's work force by 30%.

But after Congress, in the words of one member of the leasing team, stopped "throwing money at us," the regulator then had to rush again, this time to find other government agencies willing to share all that space.

The owner of the property -- the sprawling Constitution Center -- still wants $94 million for breaking the 10-year lease early.

Despite all the angst out there, sell side analysts at Keefe Bruyette & Woods say the cost of looming regulation for the industry will be "incremental" at worst and that fears are "overblown."

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In particular, the KBW research department now believes that current proposals to put a ceiling on 12b-1 distribution fees on mutual funds will have a negligible effect on advisors' bottom lines.

Based on the dwindling amount of sales of products carrying high 12b-1 fees, market forces may have already taken care of this issue for investors, the analysts say.

Interestingly, where these products are being sold, it appears to be through fee-based relationships.

These arrangements presumably pay the advisor a lot more than the 0.25% that will be the cap for 12b-1 commissions under the new rules, so advisors will still be earning a significant amount of revenue here.

For the rest, everything hinges on whether the final rule allows fund companies to keep charging recurring fees above 0.25% for awhile.

As the analysts note, this kind of "grandfathering" approach would let the money managers keep big 12b-1 fees for longer than most investors keep their funds.

State securities regulators in Massachusetts have settled their end of the Medical Capital Holdings case with Securities America -- which means their citizens won't lose a single dime on the debacle.

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The first $2.8 million payment to 63 aggrieved MA investors is due in the next few days. Another $2.2 million will follow.

What's remarkable here, as usual, is the scale of these accounts that almost brought down one of the biggest firms out there -- and did in fact destroy several smaller ones.

Securities America sold $700 million in bad debt instruments from Medical Capital Holdings, but apparently only 0.7% of that came from the small but wealthy state of Massachusetts.

And those Bay State citizens who bought into these investments only nibbled, buying maybe $80,000 apiece.

It's real money, but I have to wonder now how concentrated these holdings were. Are we talking about widows and orphans being sold Medical Capital debt as a core investment, or ultra-high-net-worth families getting a taste of something exotic?

Insiders I've talked to say Securities America did its due diligence on these instruments. So if these were ultra-wealthy clients -- in Massachusetts and throughout the country -- wouldn't having a small allocation go bad be part of the normal cost of participating in the market?

And if these were middle-market retirees, the issue isn't really due diligence so much as the suitability of cramming so much of an exotic Reg. D instrument into a retail portfolio.

Tags: compliance | FINRA | fraud

Ironically enough, as Ameriprise looks for a buyer for its fine-weakened Securities America unit, the firm recently settled a sticky FINRA complaint of its own.

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FINRA banned former Ameriprise rep William Ray Collins Jr. from the industry back in September for allegedly forging his clients' names on money orders and used that cash to pay their transaction fees.

It's a relatively bizarre story in itself, since Collins reportedly didn't profit from the forgeries. Instead, he simply didn't disclose the fees his clients would pay on their variable annuity purchases, then signed their names on money orders in order to pay them. 

He appears to have bought the money orders with his own money.

But it turns out that Ameriprise knew about the scheme as early as December 2005, but didn't investigate further until early 2008. 

At that point, a new compliance system re-uncovered the faulty paperwork and Collins was let go.

Two years is a long time to go with that kind of bad behavior on the books and $50,000 seems like a small price to pay for what would seem to be an outright failure to supervise.