An investment adviser’s principal, who also acted as Chief Compliance Officer, was censured and fined because his inadequate compliance program and failure to supervise allowed one of his investment adviser representatives to loot a client’s trust accounts. The SEC charges that the firm’s used an off-the-shelf compliance manual purchased from a compliance consultant but failed to customize the manual or properly implement it. Consequently, a senior IAR used his position as trustee to invest client assets in the firm’s private fund, invest in other unsuitable illiquid investments, and mis-use assets. The SEC asserts that the respondent failed to include policies to ensure compliance with the custody rule or adequate supervision.
OUR TAKE: This is a prime example of why the SEC should require annual third party reviews of every adviser’s compliance program. If the adviser had implemented a reasonable compliance program as required by the Advisers Act, including provisions addressing the custody rule, the client would have been protected against the wrongdoing.