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Reliance on Outside Professionals Doesn’t Mean Adviser Wasn’t Negligent

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The full SEC overturned the decision of an Administrative Law Judge and censured and fined an investment adviser for inadequate disclosure even though the respondent may have relied on the advice of an outside compliance consultant.  The SEC accuses the adviser of inadequate disclosure related to revenue sharing received from its custodian.  The adviser argued that it relied on the advice of an outside compliance consultant.  The full SEC explained that the record could not determine whether the adviser actually sought or received such advice about its disclosure.  Regardless, even had the adviser relied on the advice, the SEC opined that, although the adviser did not act with intent to deceive, it still acted negligently because of the “obvious inadequacy” of the disclosure.

OUR TAKE:  The takeaway from this decision is that reliance on outside consultants and lawyers will help a registrant avoid a finding of intent (and more punitive penalties).  However, if the misconduct is so obvious that the adviser should have known better (in the SEC’s judgment), the firm may still face discipline for negligence.

https://www.sec.gov/litigation/opinions/2016/ia-4566.pdf

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