SEC Sanctions Three Firms for Inadequate Compliance Programs
The SEC sanctioned three registered investment advisers for failing to adopt and implement an adequate compliance program under Rule 206(4)-7 of the Advisers Act. The SEC indicated that the cases “stem from an initiative within the SEC Enforcement Division’s Asset Management Unit to proactively prevent investor harm by working closely with agency examiners to ensure that viable compliance programs are in place at firms.†Robert Khuzami, the Director of the SEC’s Enforcement Division, stressed the SEC’s “renewed focus on identifying and charging firms and individuals that fail their legal obligations to maintain adequate compliance programs.†Robert Kaplan, Co-Chief of the SEC Division of Enforcement’s Asset Management Unit, said that the “failure to adopt and maintain adequate compliance policies and procedures is a significant violation of the federal securities laws†and that the SEC will work to “identify investment advisers that put their investors at risk by failing to take their compliance obligations seriously.†In all three cases, the respondents were fined. One of the advisers withdrew its registration. The other two agreed to retain an independent consultant and notify clients of the action.
In the first case, the SEC charged that the respondent failed to adopt compliance policies and procedures until alerted to the deficiency during an exam, and thereafter, failed to implement the policies and procedures. The SEC alleged that the firm did not (i) conduct any type of compliance training, (ii) performance adequate annual compliance reviews, (iii) timely revise its policies and procedures, and (iv) include sufficient detail in its compliance manual about how to execute compliance procedures. In reference to the annual reviews, the SEC said that the review that was done did not adequately describe the records reviewed, analysis performed, or findings but was merely a summary of the policies and procedures and the types of testing that could be performed. Additionally, the SEC noted that the CEO, who also served as CCO, had no compliance background and took no steps to become educated.
In the second case, the SEC alleged that the respondent’s inadequate compliance program resulted in unlawful principal transactions and undisclosed commissions. The SEC criticized the compliance manual which was focused on the broker-dealer activities of the dual registrant. According to the SEC, the manual did not address the compliance areas described in Rule 206(4)-7’s adopting release, including principal trading, fee calculation, cross trades, best execution, and securities pricing. The SEC alleged that the firm’s compliance breakdown “was caused by its failure to invest necessary resources in the firm’s advisory business.â€
In the third case, the SEC charged that the respondent failed to adopt policies and procedures and that the CEO/CCO, who took a three-year religious mission to Brazil, failed to perform his required supervisory and compliance responsibilities. The SEC alleged that the compliance manual, once prepared in response to staff comments, was an “off-the-shelf compliance manual that included language from both broker-dealer and investment adviser regulations, and was not specifically tailored to†the respondent’s business. As a result of the CEO/CCO’s absence, the firm’s advisory representatives were completely unsupervised.
OUR TAKE: Firms should take note that the SEC is pursuing firms for inadequate compliance programs even where underlying compliance violations may not exist. These three cases provide some additional guidance on what the SEC wants to see in a compliance program: a customized and current compliance manual, ongoing implementation and compliance operations, a sufficient testing program, and a competent compliance officer focused on compliance issues.
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Cipperman Compliance Services provides CCO and compliance services to registered funds and money managers. We customize compliance solutions to fit your business: full or partial compliance outsourcing, consulting engagements, and tailored compliance tools. Cipperman & Company is a unique law firm devoted exclusively to the investment management industry. We work on a wide range of transactional and regulatory matters, but we concentrate on four core areas: Fund Formation, Distribution, Compliance, and Technology.
Todd Cipperman, Esq.
Cipperman & Company
500 E. Swedesford Road
Suite 104
Wayne, PA 19087
610.687.5320
tcipperman@cipperman.com
www.cipperman.com
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Cipperman & Company
500 E. Swedesford Road
Suite 104
Wayne, PA 19087
610.687.5320
tcipperman@cipperman.com
www.cipperman.com
If you no longer wish to receive e-mail alerts, please respond to this e-mail accordingly. Nothing herein should be construed as legal advice. This e-mail may constitute an advertisement under U.S. law. This message and any attachments may contain confidential or privileged information and are only for the use of the intended recipient of this message. If you are not the intended recipient, please notify the sender by return email, and delete or destroy this and all copies of this message and all attachments. Any unauthorized disclosure, use, distribution, or reproduction of this message or any attachments is prohibited and may be unlawful.
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