Hamlin Capital Management, LLC, a New York-based investment adviser, has been charged by the Securities and Exchange Commission (SEC) with violations concerning cross-trading activity that favored particular client accounts over others.
To be more specific, Hamlin improperly moved tax-exempt municipal bonds from one client account to another at the securities’ bid price, substantially above the price where they had most recently traded. Accepted practices that comply with SEC regulations require the bonds to be traded at the midpoint between the bid and ask prices.
Approximately 21 cross trades at these inflated levels resulted in buying advisory clients overpaying in the amount of $194,500. On the other hand, failure to disclose the potential market savings on these trades deprived selling clients of $414,672 in market savings.
In addition to the improper valuation methods themselves, the SEC has also alleged that Hamlin’s compliance policies and procedures, as well as its ADV disclosures, were inadequate and inaccurate.
Failure to Comply Results in Disciplinary Action
The SEC has determined that Hamlin Capital Management violated Sections 206(2), 206(4), and 207 of the Investment Advisers Act of 1940 and Rules 206(4)-7 and 206(4)-8 thereunder.
Without admitting or denying the charges, Hamlin agreed to reimburse $609,172, plus interest, to its affected clients and pay a $900,000 penalty to the SEC.
Understand the Cross Trading Valuation Process to Maintain Compliance
This is a case of failure to understand the proper valuation process and to adopt clear, effective policies and practices that would ensure fair treatment of both sellers and buyers, as well as a failure to disclose the valuation process.
There is reason to believe that some firms engaged in cross-trading are not aware that the way in which they’re valuing bonds is incorrect — they are simply unaware of regulations.
The enforcement settlement serves as a clear reminder of the absolute necessity of appropriately documenting valuation methods, adopting sufficient compliance policies and procedures, and, perhaps most importantly, maintaining strict compliance regarding disclosures of valuation practices.
At Core Compliance and Legal Services, Inc., we have years of experience with compliance issues. If you have questions about cross trading, valuation, or disclosure policies and practices, we’re here to help — click to contact us.