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Large Adviser Fined $13 Million for Predecessors’ Compliance Breakdowns


A large investment adviser agreed to reimburse clients and pay a $13 Million penalty for compliance breakdowns related to fee billing, custody, and books and records.  According to the SEC, over a 15-year-period, the respondent overbilled clients because of coding and administrative errors included in predecessor firms’ billing systems.  The SEC faults the firm for failing to test and uncover the over-billing when it integrated the systems.  The SEC also accuses the respondent of violating the custody rule’s surprise audit requirement by failing to properly identify the accounts subject to audit.   Also, the SEC faults the firm’s books and records practices for failing to retain client agreements.  The SEC cites violations of the Advisers Act’s custody rule (206(4)-2), compliance rule (206(4)-7), and books and records rule (204-2).

OUR TAKE: Integrating operations following a combination should trigger compliance due diligence into the prior firm’s policies and procedures. Also, firms should include compliance due diligence as part of the acquisition process.


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