The SEC barred an investment adviser from the industry and ordered him to pay over $1.7 Million in disgorgement in part for looting trust accounts for which he served as a trustee. According to the SEC, the adviser sold trust assets and purported to replace those assets with lesser-valued securities in which he had a personal interest. The SEC also accuses the adviser of over-charging management fees and making misrepresentations about conflicts of interest.
OUR TAKE: This type of misconduct is exactly why the SEC should move forward and require all advisers to obtain third party compliance reviews in an effort to weed out wrongdoers. The custody rule (206(4)-2) deems an adviser to have custody where the adviser serves as the trustee of a trust, and requires an annual surprise examination to verify assets and prevent looting of the trust. Unfortunately, an adviser that is willing to steal from clients probably doesn’t prioritize compliance.