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SEC Alleges that RIA and Principal Ignored Compliance Obligations

The SEC has commenced enforcement proceedings against an adviser and its principal for disregarding its compliance obligations for over 10 years.  The SEC alleges that the firm did not even draft or adopt compliance procedures until an SEC examination commenced in 2015, 11 years after it initially registered.  The SEC also asserts that the principal named two individuals on Form ADV as Chief Compliance Officers even though neither person had responsibility for compliance, and one of the individuals did not even know that he was named as CCO.  The SEC also charges the firm with failing to conduct annual compliance reviews, comply with the custody rule, and maintain required books and records. 

The SEC will offer no quarter to RIAs who ignore their basic compliance responsibilities.  At a bare minimum, firms must appoint a dedicated and qualified CCO, adopt tailored policies and procedures, annually test the program, and generally attempt to comply with the Advisers Act.  The initiation of proceedings, rather than a settled order, suggests that the SEC intends to pursue aggressive penalties. 

Service Providers Accountable for Destruction of Broker-Dealer Records

 The SEC recently warned service providers to broker-dealers that they could not delete or discard required records in response to non-payment of fees.  The SEC explained that it has experienced difficulty in accessing required records in situations where a broker-dealer had financial problems.  The staff opined that contractual provisions that permitted the service providers to delete or discard records because of the non-payment of fees would violate Rule 17a-4.  Moreover, the loss of records could subject the service provider to secondary liability for causing or aiding and abetting the broker-dealer’s primary violation.

 Firms such as banks and consultants should take notice that the SEC and/or FINRA will take action for failure to preserve required records.  Consult your compli-pro to ascertain the records required by Rules 17a-3 and 17a-4

Broker-Dealer Fined $1.25 Million for Deleting Phone Calls and Inadequate Records Retention


The SEC fined a broker-dealer $1.25 Million for deleting recorded telephone conversations and failing to maintain books and records related to broker expenses.  The broker-dealer deleted audio files after receiving an SEC request.  The BD failed to “ensure that this litigation hold notice was distributed to the technicians in department responsible for maintaining voice recordings.”  The SEC also charges the firm with multiple failures to maintain required records of broker personal expenses and gifts and entertainment.

OUR TAKE: The SEC will take punitive action against firms that fail to preserve regulatory records, whether or not the firm acted with bad intent.  We recommend creating a regulatory records chart to serve as reference for all employees.  Also, firms should create a policy and related procedures governing how it will ensure all employees comply with regulatory requests.