Compliance January 8, 2018

SEC Fraud Charges Bring Settlements and Lifetime Industry Ban

More important than the fact that individual brokers or executives are being punished is the recognition that retirement plans and large institutional investors are routinely subject to fraud schemes.  

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The former head of ConvergEx Group’s transition management business has agreed to be barred from the securities industry and has consented to a judgment ordering him to pay more than $975,000 to settle fraud charges the Securities and Exchange Commission (SEC) filed in 2016.

The SEC’s complaint alleged that Khaled Bassily “participated in a fraudulent scheme to hide from charities, religious organizations, and retirement funds that they paid substantially higher amounts than disclosed for the execution of trading orders.”

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Without admitting or denying the SEC’s allegations, Bassily has consented to the entry of a final judgment that ordered him to pay a total of $988,414 in disgorgement, prejudgment interest and a civil penalty. The order also permanently enjoined him from violating Sections 10(b) and 15(c)(1) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933. Bassily further consented to the entry of an SEC order that barred him from the securities industry. Final judgment was entered on December 21, 2017, and the industry bar was imposed January 3, 2018.

The SEC’s successful charges here follow those announced in August 2014 against Anthony G. Blumberg, a former executive of a ConvergEx Group subsidiary, who remains involved in a federal action currently pending in Newark, New Jersey, and charges announced in December 2013 against three ConvergEx Group subsidiaries that agreed to pay more than $107 million and admitted wrongdoing to settle related charges. The SEC’s complaint filed against Blumberg says one university customer paid about $93,000 in disclosed commissions and about $543,000 in undisclosed trading profits. In another case, $1.6 million in fees allegedly went undetected. 

According to the SEC’s order instituting settled administrative proceedings, the ConvergEx brokerage firms represented to customers that they charged explicit commissions to execute equity trading orders. “However, they routinely routed orders, including orders for U.S. equities, to an offshore affiliate in Bermuda that executed them on a riskless basis and opportunistically boosted their profits by adding a mark-up or mark-down on the price of a security,” SEC charged. “The offshore affiliate often consulted with the client-facing brokers to assess the risk of customer detection before taking the extra money on top of the disclosed commissions. The mark-ups and mark-downs caused many customers to unknowingly pay more than double what they understood they were paying to have their orders executed.”

According to the SEC, customers affected by the wrongdoing included funds managed on behalf of charities, religious organizations, retirement plans, universities, and governments.

“The ConvergEx brokerages believed they would lose business if customers became aware of their mark-ups and mark-downs, so they engaged in specific acts to hide the scheme,” SEC reported. “Typically, they only took mark-ups and mark-downs on top of the disclosed commissions in situations where they believed that the risk of detection was low. They also made false and misleading statements to customers who inquired about their overall compensation, even providing certain customers with falsified trading data to cover up the fact that the offshore affiliate had taken mark-ups or mark-downs on their orders.  The practice of executing orders through the offshore affiliate was not adequately disclosed to customers and was inconsistent with ConvergEx’s advertised conflict-free agency model.  Using this practice, the ConvergEx brokers failed to seek best execution for their customers’ orders.”

In the end, according to the SEC, the subsidiary firms agreed to pay disgorgement and prejudgment interest totaling $87,424,429 and a penalty of $20 million. In determining the penalty amount, the SEC considered ConvergEx’s “substantial cooperation after the agency commenced its investigation.” The SEC also considered the company’s significant remedial measures, including the closure of the Bermuda affiliate and the discharge of a number of employees in management and other positions as it ended the practice of routing U.S. securities offshore for order handling.

Data & Research January 5, 2018

With Participation Rates Flat, Some NQDC Plan Sponsors to Make Changes

More than half plan to add to or enhance plan education and communication programs, and 21% plan to offer or enhance a company match.

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The overall rate of companies offering nonqualified deferred compensation plans (NQDCPs) increased to 85% in 2017 from a survey low of 77.2% in 2015, according to the annual Prudential/PLANSPONSOR Executive Benefit Survey.

Year over year, nearly all of large company respondents report they sponsor NQDCPs, and 2017 was no exception, with 96.8% offering this benefit, as compared to just over two-thirds (68.9%) of smaller companies.

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Two-thirds of plan sponsors that offer a NQDCP offer a voluntary deferred compensation plan, 28.6% offer a defined contribution supplemental executive retirement plan (DC SERP), 22.3% offer a 401(k) Restoration Plan, 20.9% offer a defined benefit supplemental executive retirement plan (DB SERP) and 8.3% offer a 457(b) or 457(f) plan. While 80% of responding companies don’t offer any other type of executive benefit, those that do favor restricted stock units, stock options and incentive and other programs.

Consistent with prior years, there were no predominant criteria for defining eligibility; however, for 2017, job grade and total compensation tied for most prevalent, at 21.6% each. The survey reveals minimum base salary requirements for different respondents.

Although 87% of respondents don’t plan on making any changes to their NQDCPs, of the few that are, the majority cited additions or enhancements to plan education and communication programs (52.6%), investment crediting options (42.1%) and distribution options (36.8%).

Average participation rates were relatively flat at 47%. Plan sponsors think the most important thing to eligible employees in making the decision whether or not to participate is education/communication, followed by limitations on or lack of other pre-tax deferral opportunities and confidence in company performance.

Participation rates were notably higher in plans offering matching contributions (60%), while plans not offering a company contribution had an average participation rate of 37%. A notable 21% of respondents plan to either offer or enhance the company match—a key incentive for plan participation, as noted in year-over-year survey results—or add deferral sources, which would provide plan participants with additional opportunities to meet financial planning goals and reduce their taxable income. The survey reveals the most common deferral sources offered in NQDCPs, including for Board of Director plans.

Company match prevalence remained flat overall (46.8%), and as in prior years, was more commonly offered at larger organizations (49.6%) and public companies (64.0%). Following the 401(k) match formula for compensation above Internal Revenue Service (IRS) annual limits was once again the most prevalent type of company match among survey respondents (45.6%), and a percent deferral match (40.5%) and one to replace a lost 401(k) match (36.7%) were a close second and third.

Flexible options for scheduling and receiving plan payments are a key benefit and differentiator of nonqualified plans, and the vast majority of plan sponsors offer their eligible participants a range of distribution election choices that are permitted under IRS Code Section 409A. As in previous years, separation from service was the most common distribution election offered by survey respondents (96.4%), followed by death (80.5%) and scheduled in-service (65.6%).

More survey results about participant investment crediting options, informal plan funding and recordkeeping and service providers can be found in the Summary of Results report.

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