FYI: The CEO of an investment advisory firm settled an enforcement action with the SEC based on the CEO’s role in failing to adequately resource the firm’s compliance program. According to the SEC’s order, the CEO was aware that the firm’s compliance program lacked sufficient resources but failed timely to address this deficiency, which contributed to the firm’s compliance rule violations. Facts indicated that the firm’s CCO informed management on numerous occasions that the firm’s compliance resources were inadequate, but the CEO continuously decided not to add resources. Sanctions imposed against the CEO personally included a censure, cease and desist and a $45,000 civil monetary penalty.
The IA firm itself was the subject of a separate, settled enforcement action, based on the firm’s own compliance failures. Although in the past the SEC has enforced against IAs for compliance program failures where no underlying violations were found, in this case the compliance shortcomings were alleged to have had real consequences. For example:
— Failures to monitor staff emails as required by written policies and procedures led to the firm’s failure to detect unauthorized activities by one of its employees, including violations of the firm’s gift reporting policy.
— Failures to properly monitor and document the allocation of investment opportunities resulted in at least one employee not consistently following the firm’s allocation policy for repos (the IA’s most significant business line).
— Failures to conduct adequate due diligence on counterparties and lenders led to investments of significant client assets in fraudulent loans, among other issues.
Violations were alleged against the firm under Section 204 (books and records rules), Section 206(2) (anti-fraud provisions), Rule 206(4)-7 (compliance rule) and Section 207 (filing of untrue registration application or report). The firm’s sanctions included a censure, cease and desist and a $400,000 civil monetary penalty.
Order against the CEO: https://www.sec.gov/litigation/admin/2018/ia-5062.pdf.
Order against the IA firm: https://www.sec.gov/litigation/admin/2018/ia-5061.pdf.
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