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Compliance Failures Lead to Firm’s Demise

 Compliance deficiencies led to the demise of a private fund manager because of failures to enforce a consistent redemption policy, deliver audited financial statements, and file accurate Form ADVs.  According to the SEC, the firm allowed certain clients and insiders the ability to redeem before the stated 90-day redemption policy.  The firm also failed to deliver audited financials as required by the custody rule.  The SEC also cites the firm for filing inaccurate Form ADVs, including claiming SEC registration eligibility even though the firm had less than $100 Million in assets under management.  The SEC attributes the failures to the firm’s deficient compliance program which used a template manual and did not require annual compliance reviews.   

 OUR TAKE: Failure to implement an adequate compliance program can have real-world implications for the viability of your firm.   A tight compliance program will support a more coherent operating environment that will prevent sloppy business practices that will lose clients and attract regulators. 


Lack of Compliance Infrastructure Costs Private Equity Firm and Principals

The SEC fined a private equity firm and its principals, and barred the former CFO/CCO from the industry, for engaging in multiple conflicts of interest transactions with the funds.  According to the SEC, prohibited transactions included (i) borrowing from the funds, (ii) failing to make capital contributions, and (iii) using false bookkeeping adjustments to hide transactions.  The transactions violated the LPA and were not properly disclosed in capital call notices or financial statements.  In addition to anti-fraud and books and records violations, the SEC charged violations of the compliance rule (206(4)-7) because the compliance manual did not address conflicts of interest including control by the two principals and related party transactions.  As part of the settlement, the firm hired a new CCO, a new general counsel, a new CFO, and an independent compliance consultant.

OUR TAKE: Hiring a competent CCO before the SEC arrived would likely have avoided the enforcement action and the resulting damage to the firm’s business and reputation.  It appears that the principals had no sensitivity to the regulatory environment in which they were operating.


SEC Publishes List of Most Cited Exam Deficiencies

The SEC’s Office of Compliance Inspections and Examinations has issued a Risk Alert listing the 5 most frequently identified compliance topics: weak compliance programs, insufficient and late filings, violations of the custody rule, Code of Ethics compliance deficiencies, and books and records.  OCIE highlights specific compliance problems including untailored “off-the-shelf” manuals, weak or absent annual reviews, and failure to follow procedures.  OCIE cited Form ADV and Form PF failures including inaccurate disclosures and late filings.  Other common deficiencies include failures (i) to follow the custody rule due to lack of knowledge about its requirements, (ii) to identify access persons, and (iii) to maintain complete and accessible books and records.

OUR TAKE: Compliance with the Advisers Act is not intuitive.  It requires a thorough knowledge of the specific requirements of the statute and all its rules.  Firms must hire a regulatory professional or a compliance services firm to assist with compliance or face significant exam deficiencies or an enforcement action.