Data & Research October 31, 2008

Adviser Confidence Falls to Lowest Point in Rydex Index History

Many advisers have been the champions of phrases such as “stay the course″ and “weather the storm,″ but even advisers have a sinking confidence in the market, according to The Advisor Confidence Index.
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In October, adviser confidence in the economy and stock market sank for the second month in a row, according to a release from Rydex AdvisorBenchmarking, which produces the Advisor Confidence Index (ACI)—a benchmark that gauges adviser views on the U.S. economy and stock market. The index was 79.07 in October, down 14% from 92.22 in September.

Rydex surveyed registered investment advisers (RIAs), and found they are stepping up their communication and reassurance efforts, and, yes, “staying the course,’ with investment strategies (see “Guiding Participants through Ups and Downs’).

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More than half of financial advisers surveyed took preventative measures, moving their clients’ money to cash prior to the financial crisis, according to the release. Also, 12% of advisers increased their allocation to alternative investments in the past few weeks, and 37% of advisers employed alternative investments prior to the financial crisis in order to help their clients better handle the volatile market. Twenty-two percent of advisers are planning to increase allocations to alternatives in the near future (see “The Alternative Route“).

However, overall movement within clients’ portfolios has been relatively low, according to the survey (see “CFP Clients Stick to Strategy’). Most advisers say they are maintaining the current allocations of their clients’ portfolios. In the near future, 51% of advisers surveyed are planning to maintain current asset allocations.

To help clam their clients, advisers surveyed said they have discussed the current market drop with their clients and have been proactively calling (83%) and sending e-mails to their clients (66%) (see “How to Manage Affluent Investors in Financial Crisis“). Almost half (44%) of advisers surveyed have been proactively meeting with clients, and almost half of the advisers were also actively reaching out to their clients before the financial crisis, according to the release.

Despite falling confidence, most financial advisers are positive about the government’s Wall Street rescue plan, with 70% of advisers supporting the financial bailout (see “Advisers Think Bailout Will Work, Survey Says“). However, almost half (43%) of advisers surveyed did not support the Security and Exchange Commission’s actions regarding short-selling and its overall role in the crisis (see “SEC Bans Shorts of 799 Financial Stocks“).

Compliance October 31, 2008

SEC Charges B/D Firm for Improper Gifts to Fidelity Employees

The Securities and Exchange Commission (SEC) charged privately held, registered broker/dealer Lazard Capital Markets LLC with failing to supervise three employees who spent more than $600,000 while 'improperly entertaining' traders at Fidelity Investments.
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According to a news release from the SEC, the traders were trying to generate brokerage business. The SEC also charged the three employees and a supervisor for their roles in securities laws violations by Fidelity traders.

Earlier this year, the SEC charged Fidelity and current and former executives and employees for improperly accepting lavish gifts provided by brokers. Among those charged were former Fidelity equity trader Thomas Bruderman.

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The agency’s orders issued Thursday found that David Tashjian, the former head of Lazard Capital Markets’ U.S. sales and trading department, and former registered representatives Robert Ward and W. Daniel Williams facilitated Bruderman’s violations of the securities laws by taking him on trips to such destinations as Europe, the Bahamas, the Caribbean, Florida, and Napa Valley, California, often by private plane, and paying for his meals and lodging at high-end restaurants and hotels. According to the orders, Bruderman also was provided with race car driving lessons, adult entertainment, and expensive wine, and approximately $50,000 was contributed toward his elaborate bachelor party in Miami.

The SEC also said that Tashjian and Louis Gregory Rice, former head of Lazard Capital Markets’ U.S. equity sales and trading desk, failed to supervise Ward and Williams during their misconduct.

“Mutual fund traders owe their loyalty and allegiance solely to the funds and their investors. When registered representatives provide mutual fund traders with prohibited travel, entertainment and gifts, it may impair their objective judgment and harm investors,’ said George Curtis, deputy director of the SEC’s Division of Enforcement, in the release.

Preventing Illegal Compensation

The SEC warned that brokerage firms must implement procedures to prevent employees from illegally providing compensation for brokerage business.

The SEC found that Lazard Capital Markets failed to supervise Tashjian, Ward, and Williams and detect or prevent their aiding and abetting violations of Section 17(e)(1) of the Investment Company Act. Lazard Capital Markets consented to the order without admitting or denying the findings, agreeing to be censured and pay disgorgement of $1,817,629 plus prejudgment interest of $429,379.04, and a penalty of $600,000, according to the SEC.

Tashjian, Rice, Ward, and Williams also settled the SEC’s charges without admitting or denying the allegations. The three were ordered to cease from committing or causing any further violations and will pay penalties of $75,000, $50,000, and $25,000, respectively, and will be suspended from associating with a broker, dealer, or investment company for nine months, six months, and three months, respectively. For his supervisory lapses, Rice was ordered to pay a $60,000 penalty and be suspended for a period of six months from associating in a supervisory capacity with any broker or dealer.


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