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Under-Resourced Compliance Department Leads to Enforcement Action for Illegal Cross-Trading

Compliance Department

The SEC fined and censured a fund manager because its under-resourced compliance department allowed unlawful cross-trading and principal trading.  The SEC charges that the firm engaged in illegal cross-trading and principal trading between registered funds and other affiliated clients by using an interpositioned broker as part of pre-arranged transactions.  Although the firm had relevant written policies and procedures, according to the SEC, “the individuals working on cross trading within [the firm’s] compliance department were underqualified, under resourced, and required additional training and resources to effectively implement [the] trading restrictions.”  The SEC faulted the firm, and not the compliance department, because “[s]enior members of the compliance department raised the need for additional compliance resources on multiple occasions to … senior management” but those requests were not met.  Much of the relevant monitoring was delegated to a “low-level administrative assistant” because of heavy compliance workloads.

OUR TAKE: The SEC will hold management accountable for failing to properly fund the compliance function, especially after the compliance department has informed management that more help is needed.  As a guide, we recommend that firms spend no less than 5% of revenues or 7% of operating costs on compliance infrastructure, including personnel and technology.

https://www.sec.gov/litigation/admin/2016/ia-4534.pdf