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SEC Bars Dual-Hatted Executive for Inadequate Form ADV Disclosures

CCO Wearing too Many Hats 

The SEC barred the principal/chief compliance officer of an investment adviser for inadequate ADV disclosure about revenue sharing and the firm’s financial condition.  The SEC also revoked the firm’s registration.  The SEC alleges that the firm’s ADV failed to disclose that the principal received revenue sharing out of 12b-1 fees paid on client assets even though lower-expense share classes of the same funds were available.  The SEC also faults the principal and the firm for failing to disclose its deteriorating financial condition including its difficulties meeting payroll and rent obligations.  The SEC explained, “As the sole owner and chief compliance officer, it was [the respondent’s] responsibility to review and ensure the accuracy” of Form ADV.  The executive “should have known that the Forms ADV contained materially misleading statements and omitted material facts” but he “failed to exercise reasonable care in reviewing and signing” the ADV.

OUR TAKE: Advisers should have a dedicated chief compliance officer that knows the rules and can act as a check against conflicts of interest.  The SEC has brought several enforcement cases against dual-hatted executives that short-change compliance.


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