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Large Asset Manager Agrees to Pay over $21 Million to Settle Compliance Failures

A large institutional asset manager agreed to pay over $21 Million to settle charges that it failed to reimburse clients to which it allocated impermissible securities and for engaging in illegal cross-trading through an interpositioned broker.   The SEC charges that the respondent’s compliance team incorrectly coded a security in the firm’s portfolio compliance system, resulting in an impermissible allocation to ERISA accounts.  The SEC charges that the firm failed to immediately make clients whole because it narrowly construed its error correction policy as not including this type of portfolio error.  The SEC also charges the firm for arranging cross-trades between registered investment companies through an interpositioned broker that benefitted the buy side over the sell side.  The SEC faults the firm for failing to allocate sufficient compliance monitoring resources to the cross-trading activities.  The SEC charges violations of the compliance and anti-fraud rules of the Investment Advisers Act and the affiliate transaction provisions of the Investment Company Act.
OUR TAKE: The SEC heavily criticizes the firm for taking a very restrictive interpretation of its error correction policy, which the SEC says allowed the firm to avoid immediate restitution.  Taking a legalistic approach may work in civil litigation, but it won’t persuade the SEC.  With respect to cross-trading, firms should implement portfolio compliance monitoring that does not rely solely on the portfolio managers.  Both these situations show the importance of having compliance personnel with industry experience.

One comment

  1. Jaqueline Hummel says:

    This SEC’s findings with respect to the trading error are very scary! Compliance personnel did a lot of the right things, including using a pre-trade compliance system, reviewing alerts, and elevating the issue.
    Additionally, after the error was brought to the firm’s attention, an investigation was commenced and counsel was consulted.

    What scares me in this case is that the firm took a lot of the right steps once the issue was discovered, but ultimately came to a conclusion that the SEC disagreed with. And this led to the SEC finding that there was a violation of the Compliance Rule. To me, that is a frightening result for compliance staff.

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