MONEY financial advisers

Political Campaigns Can Be Hazardous for Financial Advisers

Political campaign supporters
Blend Images - Hill Street Studi—Getty Images

A Pennsylvania firm agreed last month to pay a $300,000 fine after the SEC alleged it had violated campaign-contribution rules.

Election season is under way, which means opportunities are mounting for public retirement plan advisers to do the wrong thing.

Investment advisers and certain employees who donate to many types of political campaigns are not allowed to advise state and local governments for two years, according to a 2010 U.S. Securities and Exchange Commission rule. Advisers who stray over that line can face tough consequences.

The SEC’s “pay-to-play” rule is in place to prevent advisers from using campaign contributions to persuade state and local governments to hire them. States, municipalities and government agencies typically have their own versions.

Advisory firms that fail to follow those rules can face hefty penalties.

In the SEC’s first such enforcement case against an investment adviser, TL Ventures Inc agreed on June 20 to pay nearly $300,000 to end charges that it received advisory fees from state and city pension funds after one of its associates had donated to a Philadelphia mayoral candidate and the Pennsylvania governor in 2011.

The Wayne, Pa., private equity firm neither admitted nor denied the SEC’s allegations.

The case is rattling advisers, said New York lawyer Jisha Dymond, who counsels companies and candidates about political law.


Advisers must also slog through other versions of pay-to-play rules from individual states and municipalities, Dymond said.

Among the concerns: conflicts between the rules. In New Jersey, for example, advisers to public pensions cannot contribute to state political party committees. But the SEC does not impose that restriction, Dymond said. Advisers can, however, get in trouble with the SEC for pushing others to contribute to political parties.

“In an election year, there’s so many different ways to hit a trip wire in terms of compliance,” Dymond said.

In the coming months, gubernatorial elections will be held in 36 states and U.S. three territories, according to the National Governors Association. That is in addition to state and municipal elections slated for November.

The SEC rule applies mainly to advisory firm executives and employees responsible for snagging business from state and local governments.

It typically does not involve federal elections, such as U.S. Senate campaigns for November midterm elections. But it could kick in when a state governor runs for a federal office. That is because he or she can still influence the selection of state financial advisers, said Ronald Jacobs, a Washington lawyer who specializes in political law.


Now is an ideal time for firms that advise pensions to review their campaign donation procedures and the various rules, lawyers say.

Remind employees who fall under the rule that the firm’s compliance staff must approve their contributions in advance, said Jacobs.

Some advisers simply ban contributions. “It’s easier than trying to figure out nuances,” said Stefan Passantino, a Washington lawyer who advises companies and candidates on pay-to-play issues.

But that might be overkill, Jacobs said. Many advisory firms limit their business to a specific state or municipality, or their employees live in a certain area. That makes it easy to decide which rules apply.


Does Anybody Need a Money-Market Fund Anymore?

New regulations are meant to protect money market mutual funds from another 2008-like panic.

On Thursday, the Wall Street Journal reported that the Securities and Exchange Commission is expected to approve new regulations for money-market mutual funds. Remember money-market funds? Before the financial crisis, these funds were very popular places to stash money because each share was expected to maintain $1 value. Your principal would remain the same, and the fund would pay substantially higher interest rates than a bank savings account.

But these days for retail investors, money-market mutual funds are something of an afterthought.

So why is the SEC intent on regulating them now? And will tighter rules push them further into irrelevance? Here’s what you need to know:

What going on?

A money-market fund is a mutual fund that’s required by law to invest only in low-risk securities. (Don’t confuse funds with money-market accounts at FDIC-insured banks. These rules don’t affect those.)

There are different kinds of money-market funds. Some are aimed at retail investors. So-called prime institutional funds, on the other hand, are higher-yielding products used by companies and large investors to stash their cash. The big news in the proposed rules affects just the prime institutional funds.

Prime institutional funds would have to let their share price float with the market, effectively removing the $1 share price expectation.

The SEC reportedly also wants to impose restrictions preventing investors from pulling their money out of these funds during times of instability, or discouraging them from doing so by charging a withdrawal fee. It’s unclear from the reporting so far which kinds of funds this would affect.

Why is the SEC doing this?

As MONEY’s Penelope Wang wrote in 2012 when rumors of new regulations were first circulating, the financial crisis revealed serious vulnerabilities to money-market funds. When shares in a $62 billion fund fell under $1 in 2008, it triggered a run on money markets.

In order to stabilize the funds, Washington was forced to step in and offer FDIC insurance (the same insurance that protects your bank account). That insurance ran out in 2009, and now the funds are once again unprotected against another run.

The majority of the SEC believes a primary way to prevent future panics is to remind investors that money-market funds are not the same as an FDIC-insured money-market account at a bank. Before the crisis, the funds seemed like a can’t-lose proposition. The safety of a savings account with double the return? Sign me up. But as investors learned, you actually can lose.

What does it mean for you?

Not much, at least not right away. The floating rate rules only apply to prime institutional funds, which the Wall Street Journal says make up about 37% of the industry.

The change also won’t be very important until money-market funds look more attractive than they do today. Historically low interest rates from the Federal Reserve have actually made conventional savings accounts a more lucrative place to deposit money than money-market funds. The average money-market fund returns 0.01% interest according to That’s slightly less than a checking account.

Investors have already responded to money funds’ poor value proposition by pulling their money out. In August of 2008, iMoney shows there was $758.3 billion invested in prime money fund assets. In March of 2014, that number had gone down to $497.3 billion.

Finally, it appears unlikely that money-market funds will ever be as desirable as they were pre-crisis. As the WSJ’s Andrew Ackerman points out, money funds previously offered high returns, $1-to-$1 security, and liquidity. Interest rates have killed the returns, and the new regulations will limit liquidity and kill the dollar-for-dollar promise.

Don’t count the lobbyists out yet

Fund companies are really, really unhappy about the SEC’s proposed regulations. They’ve been fighting the rules for years, and until there’s an official announcement, you shouldn’t be sure anything is actually going to happen.

Others are worried the new regulations, specifically redemption restrictions, might actually cause runs on the market as investors fear they could be prevented from pulling money out if things get worse.

But the SEC may have picked a perfect time to do this. With rates so low, few retail savers care much about money-market funds. That wasn’t true back when yields were richer and any new regulation of money-market funds might have been met with a hue and cry from middle-class savers. Today? Crickets.

MONEY stocks

WATCH: Insider Trading is More Widespread Than You Thought

According to a new study, nearly 25 percent of all public company deals involve some insider trading.

TIME insider trading

Hedge Fund Manager Gets 3 Year Sentence for Insider Trading

Michael Steinberg SAC
Michael Steinberg, former SAC Capital portfolio manager, leaves Federal Court after sentencing in New York City on May 16, 2014. Andrew Gombert—EPA

Michael Steinberg was sentenced to 3 1/2 years in prison for insider trading on Friday. His prosecution was part of a decade-long federal investigation into former hedge fund giant SAC Capital and its billionaire founder Steven A. Cohen

Michael Steinberg, a top lieutenant to billionaire hedge fund mogul Steven A. Cohen, was sentenced to 3 1/2 years in prison for insider trading on Friday after being found guilty last year of securities fraud and conspiracy charges.

Steinberg’s sentencing is the latest black mark on Cohen’s former hedge fund, SAC Capital, which last fall pleaded guilty to securities fraud and agreed to pay $1.8 billion in the largest insider trading fine in U.S. history.

“Michael Steinberg traded on information from company insiders at Dell and NVIDIA to reap nearly $2 million in illegal profits,” Manhattan U.S. Attorney Preet Bharara said in a statement emailed to TIME late Friday. “Today he has learned the steep cost of those transactions.”

Steinberg, 42, was found guilty last December of conspiracy to commit securities fraud and four counts of securities fraud for insider trading involving two tech stocks, Dell and NVIDIA, that reaped $1.8 million.

“For most people on the planet, $1.8 million of gain is a lifetime of accumulated wealth,” U.S. District Judge Richard Sullivan said before he sentenced Steinberg to prison, according to Bloomberg. “Maybe in a hedge fund it’s no big deal but it’s a lot of money to most people.”

Prosecutors had urged Judge Sullivan to sentence Steinberg to more than six years in prison.

Steinberg’s prosecution was part of a decade-long federal investigation into SAC Capital. Last year, SAC was charged with securities and wire fraud for a scheme in which the fund engaged in a pattern of “systematic insider trading” that allowed it to reap hundreds of millions of dollars in illegal profits.

In April, a federal judge in New York accepted SAC’s guilty plea and approved a landmark $1.8 billion settlement with the government, effectively concluding a decade-long criminal investigation. SAC agreed to shut down its investment advisory business, but was allowed to continue to do business under a new name as a so-called “family office” managing Cohen’s $9 billion fortune.

Federal authorities have been investigating SAC for a decade — rumors of insider trading have been swirling around the hedge fund for years — and have secured guilty pleas or convictions from eight of its former employees. Cohen, who remains under investigation by the FBI, has never been charged with a crime.

It appears unlikely that Cohen will ever be personally indicted for his role leading a firm that was “riddled with criminal conduct,” according to federal prosecutors. Cohen does face civil charges from the Securities and Exchange Commission alleging that he failed to supervise his employees, and could ultimately be banned from the securities industry for life.

Steinberg has been granted bail, pending an appeal, according to Reuters.


Online Matchmaker Zoosk Files $100M IPO

While it has yet to log a profit, the popular dating site boasts 26 million members and a top iTunes App. It filed papers with the Securities and Exchange Commission Wednesday announcing a planned $100 million initial public offering

The online dating website Zoosk filed papers with the Securities and Exchange Commission Wednesday announcing a planned $100 million initial public offering.

The San Francisco startup was founded in 2007 and began as a website but has been particularly successful as a mobile app, grabbing the number one grossing dating app spot in the Apple app store. The 26-million member service, with users spread across 80 countries, saw revenues of $178 million last year for a net loss of $2.6 million in 2013, Techcrunch reports. In 2012, the site posted a significantly higher net loss of $20.7 million and revenues of just $109 million.

While Zoosk’s earnings have yet to hit positive territory, the service has been gaining users at a rapid pace. According to its IPO filing, by the end of 2013 Zoosk had a total of 26 million members and 650,000 paying subscribers — up 44% and 35%, respectively from 2012.

Bookrunners for the IPO include Bank of America Merrill Lynch, Citigroup, and RBC Capital Markets, according to Techcrunch.


TIME Newsmaker Interview

Exclusive: SEC Chair Mary Jo White On Not Sleeping, Money Markets And The Angry Left

In her first year at the Securities and Exchange Commission, Chair Mary Jo White has toughened enforcement, broken a partisan stalemate over post-crash regulation and launched studies of high frequency trading and market fragmentation. In a profile in this week’s magazine, available to subscribers here, TIME reports on how she has turned the agency around and where she is taking it.

Last month she sat down for an interview with TIME in her office overlooking the U.S. Capitol Building. An edited version follows.

One of the first things you did on arriving at the SEC was to change its settlement policy to require admissions of guilt in certain cases. How did you come to that position?

When I was U.S. Attorney I actually did the first deferred prosecution agreement and in that case I decided admissions really added to the accountability of the purported potential defendant.

The money market fund rule proposed last June broke a rule-making stalemate at the SEC but it was a compromise. Why should everyday Americans have faith that a rule produced by a political compromise will be effective?

Our proposal was based on a very important analysis and study by our economists, and that made a tremendous impact not only on me, but on the other commissioners [by showing that the 2010 reforms] didn’t completely address the phenomenon that we’d seen, the structural vulnerability that we’d seen,during the financial crisis. Second, this is an independent agency, we are deciding this on the merits.

Sen. Sherrod Brown [Democrat of Ohio] said he voted against you in committee in part because he thought you were too close to Wall Street. What do you say to those who say as a white collar defense lawyer you’re predisposed to Wall Street’s view more than the individual investor you’re charged with protecting?

My job here, my duty here, is to serve the American public, obviously, including investors in our markets, and that’s what I do. I started my career in the private sector and then became U.S. attorney. I think I was a stronger U.S. attorney, and I frankly think I am a stronger Chair of the SEC, because of that experience.

You said the policy of requiring admissions of guilt would evolve. What do you mean by that?

I would expect it to expand. There are lots of things you could put into the bucket of “particularly egregious conduct,” which is one of things we consider when seeking admissions. So far we’ve proceeded primarily with admissions against institutions, which I think is appropriate. But one must also think about appropriate cases for individuals too when the conduct was particularly egregious.

Sen. Elizabeth Warren famously grilled your predecessor for not prosecuting big banks.

I think what she was saying was, are they too big to try in court? The answer is they’re not too big to try. If you get everything you ask for in a settlement that the law allows you to have and they agree to it, there’s not going to be a trial. There is a premium that companies of all kinds place on putting the matter behind them. So that’s going to translate into not very many trials because they’re going to give us as the government all the relief we are seeking in a settlement.

Why have you proposed a review of company’s public disclosure procedures? The left is angry.

And they shouldn’t be. All you have to do is read the disclosures that are out there now and be struck by the fact that we can do this better and in a more meaningful way. The idea isn’t less disclosure, the idea is more meaningful disclosure for investors.

The left in general is unhappy. They see you as being overly solicitous to concerns of commissioners on the right and staffers here whom they perceive to be institutionally aligned with prior administrations.

I’m basically merits driven. I’m literally an independent. Apolitical. So that I am not always going to be with the left’s perceived interests or the right’s perceived interests. It’s going to be what I think the right answer is. Look, you have to decide over time, no matter who you are, what I’m about.

One of the things that’s interesting about this job is that it’s unlike being U.S. Attorney, where 90% of what you do, everybody loves. You’re going after bad guys. Here everything you do somebody’s going to dislike. That just kind of goes with the territory I think, and my job is to do what I think is the right thing. Carry out the mission the best way I can.

Is there anything about the market structure that worries you, that keeps you up at night? That makes you feel like there’s an imminent danger to the economy or the markets?

My usual answer to what keeps me up is I don’t sleep. Which is actually true.

How many hours of sleep do you get a night?

About four. That’s always been true. It serves me very well now.

But in terms of the market structure issues, each issue can undermine the confidence in our markets. The fragmentation of markets, dark pools and high frequency traders—it’s important to say that those phenomena are pretty well known.

The impacts, however, are not as well known and the theories about them are all over the lot. And so one of my primary focuses, really since before I walked in the door, was to make sure that we were doing everything we could to fully understand those issues. We do have a lot of safeguards. It’s just a matter of what else do we need to do, to make it even better, more resilient.

Even your friends say that while you’re an expert on enforcement, you’re a novice on market structure and rules.

Every chair and every commissioner has different expertise. The staff, however, has the full range of expertise. So you pick your staff well. You listen to them. You learn. I think I’m a quick study. I also, in my prior life, sat on the NASDAQ board for four years and was exposed to a number of these issues then, including many of the market structure issues. I made a decision about whether, given my particular background, I thought I could do a very strong job here and I certainly made the decision that I could. And I guess time will tell.

What’s your vision for the commission and what you can achieve while you’re here?

Overall vision is that it remains the very strong independent agency that it is, that oversees the fairness and safety of the markets on behalf of companies and investors and that’s really the heart of it. I’d like to see significant progress made on market structure issues. Being perceived as a strong cop on the beat I think is very important on the enforcement side, in terms of the confidence in the safety of our markets and the credibility not just of law enforcement but of government itself.

What does personal success look like?

Did a good job and was a strong leader of a strong agency.

Have you had any conversations with the White House or anybody else about being Attorney General if that job opened up?

I’m not going to talk about specific conversations.I’m here to do this job.



U.S. Officials Bust Pyramid Scheme Promoted on Facebook

To match Special Report SEC/INVESTIGATIONS
A general exterior view of the U.S. Securities and Exchange Commission (SEC) headquarters in Washington, June 24, 2011. Jonathan Ernst—Reuters

An alleged fraudulent investment scheme was frozen by court order, as the U.S. Securities and Exchange Commission said the company behind the ploy had been "exploiting investors" by investing into various securities for minutes at a time

The U.S. Securities and Exchange Commission has taken swift action against two companies deemed to be effectively operating a pyramid scheme on both Facebook and Twitter, according to USA Today.

A federal court paved the way this week for the body to freeze the accounts of Fleet Mutual Wealth and MWF Financial, which operated under the name Mutual Wealth.

Federal officials claimed the front company exploited social media users on Facebook and Twitter, who were promised returns of 2% to 3% a week in accordance with a “strategy that invests into securities for no more than a few minutes.”

The Commission claims the firm lied about investing clients’ money and was transferring the capital to offshore bank accounts.

[USA Today]


Why the Goldman Charges Could Hasten Financial Reform

The Securities and Exchange Commission’s civil fraud charges against Goldman Sachs will no doubt help stoke populist anti-Wall Street sentiment. But the specifics of the complaint, if they turn out to be true, are also a blow to the intellectual underpinnings of anti-regulatory philosophy. And it could give Democrats the advantage in pushing their financial reform measures over the top.

Wall Street has looked pretty foolish over the past three years, but there was a certain comfort in knowing that there were a few smart guys who took the right side of the trade. Like hedge fund manager John Paulson, who became famous for his winning “short” position on mortgage securities.

As long as there are people like Paulson willing to bet against market euphoria, the argument goes, markets should be able to regulate themselves, at least most of the time. People won’t be able to sell dubious securities for very long, because the shorts will hop in to make a profit and in the process bring that stuff down. Maybe there weren’t enough Paulsons to prevent the “hundred-year flood” that led to this financial crisis. But the fact that there were a few suggests that the system basically works, and just needs some tweaking at the edges — maybe just some more transparency.

But what if, as the SEC charges, the guys who make the toxic stuff are working with the ones who bet against it? The complaint says that Paulson’s fund wasn’t merely taking the other side of the bet. As explains,

The SEC’s civil fraud complaint alleges that Goldman allowed hedge fund Paulson & Co. — run by John Paulson, who made billions of dollars betting on the subprime collapse — to help select securities in the CDO.

Goldman didn’t tell investors that Paulson was shorting the CDO, or betting its value would fall. When the CDO’s value plunged within months of its issuance, Paulson walked off with $1 billion, the SEC said.

Got that straight? According to the SEC, Goldman devised a financial product and sold it to investors without telling them that someone who had helped them devise that product was betting on its failure. In that scenario, it’s sort of like neglecting to tell a farmer that the hen house you sold him was designed by a fox. notes that Goldman Sachs, in a statement, calls the SEC’s charges “completely unfounded in law and fact.” Earlier this month, the company devoted part of its annual report to shareholders to defending its role in the mortgage-securitization market.

Paulson and his firm aren’t named in the charges, an SEC official told the Wall Street Journal, because they didn’t have a duty to disclose to other investors. (Paulson, by the way, is not related to Henry Paulson, former Goldman CEO and former Treasury Secretary.)

We’ll see what happens. But as of today it’s a lot harder to argue that ruthless competition in markets makes regulation redundant. It’s ruthless out there, all right. But competitive? Maybe not so much.

By the way, if this happened the way the SEC says it did, it probably wasn’t unique. ProPublica and NPR’s This American Life broke a similar story last week about “the Magnetar trade.” It’s a ripping yarn. And there’s already a musical! This pretty much sums the mechanics, with a catchy tune:

Bet Against the American Dream from Alexander Hotz on Vimeo.

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More Money Thursday Roundup: Dependable Toyotas & College Funding Strategies

Personal finance from around the Web:

  • Maybe those Toyotas aren’t so bad after all: J.D. Power and Associates ranked the Prius first in its compact car category for the 2010 Car Dependability Study, and its Tundra topped the list for pickups. [BizJournal]
  • Does a private, online meeting of your family and your financial adviser sound appealing? Blueleaf, an Internet start-up, is working to create a virtual “kitchen table” discussion space where users will be able to access all their account and investment information online and talk about it. [Innovation Economy]
  • Saving smart for your kid’s college education doesn’t necessarily mean mortgaging the house to finance four years of undergraduate education. Here’s how to be strategic in putting money aside based upon your tax bracket, child’s age, and expected income. [MSN Money]

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