A registered investment adviser agreed to hire a dedicated chief compliance officer to settle charges that it over-billed clients. The SEC also censured both the firm and its CEO/CCO and ordered fines, disgorgement, and the appointment of an Independent Compliance Consultant. The SEC alleges that the firm over-billed clients by charging its asset management fee based on total asset balances that did not deduct securities sale proceeds from margin balances. Although the firm claimed that this was the understanding with the clients, the investment management agreements did not reflect this understanding. The SEC charges the firm with violating the compliance rule (206(4)-7), the books and records rule (204-2), and the disclosure rule (207).
OUR TAKE: We have warned that firms should hire a dedicated CCO (either internally or externally) rather than dual-hatting a firm principal. Only an experienced compli-pro has the knowledge, skill, time, and resources to implement an effective compliance program.