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SEC Fines and Bars CCO for Ignoring Compliance Problems

The SEC fined and barred an adviser’s Chief Compliance Officer from acting in a compliance or supervisory capacity because of his failures to remedy compliance deficiencies.  The adviser hired an outside compliance consultant which recommended 59 compliance action items.  The SEC alleges that the CCO failed to address many of the issues raised including failures to (i) ensure a surprise audit pursuant to the custody rule, (ii) retain emails and other electronic records, and (iii) implement policies to protect customer information.  The SEC also charges the CCO with compliance program deficiencies including failures to update the compliance manual or conduct any meaningful annual review of the compliance program.  The firm’s president/principal was also censured and fined.

OUR TAKE: The SEC doesn’t often prosecute standalone (i.e. not dual hat) CCOs without an underlying client loss, but it will if the CCO ignores obvious compliance deficiencies of which he has notice.  This is what we call “compliance voodoo” i.e. an appearance of compliance infrastructure without an effective program.  This CCO had a compliance manual, did some quarterly testing, and hired a third party consultant.  But, neither the CCO nor the firm took any action to actually implement relevant procedures to address cited compliance deficiencies.


RIA Failed to Conduct Annual Compliance Reviews and Appointed Admin as CCO

three 3D men as symbol of say, see or hear nothing

The SEC fined and censured a registered investment adviser for failing to conduct annual compliance reviews and appointing a chief compliance officer without relevant experience.  The SEC asserts that the respondent, which registered in 2010, never conducted an annual review of its compliance policies and procedures as required by the compliance rule (206(4)-7).  In fact, according to the SEC, neither the firm nor the CCO were even aware of the requirement.  The SEC also faults the firm for appointing as chief compliance officer an inexperienced administrative assistant who spent most of her time on administrative duties.

OUR TAKE: Compliance programs, at their most fundamental, must include the implementation of effective policies and procedures reasonably designed to achieve compliance with the Advisers Act, the appointment of a qualified and dedicated chief compliance officer, and annual reviews of the compliance program.  The SEC will bring an enforcement action for a weak compliance program even in the absence of any other regulatory violation or client harm.