SEC Requires Adviser to Retain Outside Firm to Remedy Weak Compliance Program
A registered investment adviser agreed to utilize an outside compliance consultant to settle SEC charges that it failed to implement an adequate compliance program. The SEC alleges that two successive chief compliance officers were incumbent employees (including a portfolio manager) that had little compliance experience or training. Also, the firm failed to conduct and document annual compliance reviews and tried to use written supervisory procedures from a predecessor broker-dealer firm as an adviser compliance manual. The SEC charges the firm with violating Rule 206(4)-7 of the Advisers Act, which requires the designation of a competent CCO, the implementation of policies and procedures, and an annual review of the compliance program. In addition to a fine and various undertakings, the firm agreed to retain an outside compliance consultant “to render compliance services” for at least 2 years.
OUR TAKE: This case is yet another example of the SEC prosecuting firms for weak compliance programs, even though the SEC did not allege any underlying substantive violations. By requiring the adviser to use an outside firm to provide ongoing services (rather than merely test an internal program), the SEC indicates that a compliance services firm can bring a level of knowledge and independence critical to compliance programs.