The SEC’s Compliance Program Initiative bore more enforcement fruit. SEC today sanctioned three investment advisory firms for repeatedly ignoring compliance problems. The Initiative targets firms that fail to address compliance deficiencies that the SEC brings to their attention.
The enforcement actions underscore the importance of conducting annual compliance reviews, as required by Rule 206(4)-7 under the Investment Advisers Act (the “Compliance Rule”), and the need to remedy compliance deficiencies when they are identified. The SEC also sanctioned one adviser for failing to tailor adequately its compliance program to reflect its business.
In one of the cases brought today, the SEC sanctioned an adviser and its principals for failing to conduct annual compliance reviews for two years, despite being notified by SEC examination staff of their obligation to do so. The SEC also found that the adviser’s website and investor brochure contained misleading statements about the amount of its assets under management and its performance record. The SEC also noted that, despite the requirement in the Compliance Rule that advisers appoint a chief compliance officer (CCO) with adequate knowledge, training and resources to assess compliance, the adviser appointed an employee with less than three months, experience to serve as its CCO.
In the second case, the SEC sanctioned two related investment advisers (one of which is no longer registered with the SEC), their principal and the advisers’ CCO for failing to adopt and implement written compliance procedures and failure to conduct annual compliance reviews as required by the Compliance Rule. In addition, the SEC sanctioned the firms for making false and misleading statements about past investment performance, compensation and conflicts of interest and for repeatedly overbilling and underbilling clients. As in the first case, these violations occurred despite warnings from SEC examination staff after an on-site examination.
The SEC brought the third case against an individual CCO based upon his current role as well as his role as the former COO/CCO of the advisers in the case immediately above. The CCO was sanctioned for not implementing adequate compliance policies and failing to conduct annual reviews of such policies as required by the Compliance Rule. In addition, the CCO was found to have published materially misleading marketing material, to have overstated the firms’ regulatory assets under management for purposes of Form ADV and to have violated Regulation S-P by removing or retaining nonpublic personal information about his prior firm’s clients when he moved to his current role.
In each case, some individuals involved agreed to financial penalties. The firms must pay civil penalties in addition to hiring an independent compliance consultant for at least three years. The cases were settled without the respondents admitting or denying any wrongdoing.
In announcing the enforcement actions, Andrew Ceresney, co-director of the Division of Enforcement, made it clear that “[f]irms must not only have policies and procedures in place, but also need to properly implement those policies and procedures.” Equally clear is that when an SEC examiner points out a compliance deficiency, advisers and their CCOs should promptly resolve those deficiencies.