The SEC has fined and imposed disclosure obligations on an RIA that failed to disclose SEC deficiencies in RFPs. The SEC alleges that the RIA responded to at least 10 RFPs for institutional mandates that requested information about deficiencies in SEC exams. According to the SEC, the respondent and its two principals ignored the question, answered with respect to a related entity, or indicated that “there were no significant findings.” The SEC notes that a 2005 exam resulted in a 7-page deficiency letter. The SEC also charges the firm’s CCO for aiding and abetting violations of Rule 206(4)-7 because he had knowledge of the exam deficiencies and participated in the RFP process. In addition to fines against the firm and the principals, the SEC settlement requires the firm to retain an independent consultant and disclose the action in its ADV and on its website.
OUR TAKE: The SEC will review RFP responses during an exam. Questions about SEC exam deficiencies are fairly common. Firms will not win the argument that a particular deficiency was not “material” or “significant.”