SEC Shuts Down Adviser Because of its Weak Compliance Program
The SEC cited violations of the Advisers Act’s compliance rule (206(4)-7) in determining to shut down an investment adviser and bar its principals from the industry. The SEC alleges that the firm failed to disclose that the firm used its discretionary investment authority to invest client assets in vehicles controlled by the principals. In addition to a misleading ADV, the SEC charges that the firm did not have an adequate compliance program. Although the firm had a compliance manual, it did not “contain procedures designed to specifically address [the firm’s] business operations and investment practices.” The firm also failed to conduct the required annual review of its policies and procedures. The CCO, also one of the principals, was charged with aiding and abetting violations of the compliance rule.
OUR TAKE: The SEC has not frequently used the compliance rule as a club in enforcement actions. Nevertheless, SEC officials have always stressed the importance of tailored policies and procedures that are adequately implemented and reviewed. The compliance manual is the beginning, not the end, of a compliance program.