CEO Did Not Understand His CCO Job
An investment adviser CEO, who also served as Chief Compliance Officer, agreed to a fine and a ban from serving as a CCO without formal training in connection with violations of the custody, compliance, and recordkeeping rules. The SEC alleges that the firm engaged independent auditors to conduct the required surprise exams as required by the custody rule but never ensured that the audit scope was sufficiently designed or that the audit firm completed the exams. The SEC also charges that the firm never engaged a qualified custodian to send account statements. The SEC asserts that the CEO/CCO caused, aided and abetted violations of the compliance rule (206(4)-7) because the CEO appointed himself as CCO even though “he had no formal training in investment adviser compliance” and “did not adequately familiarize himself with the Custody Rule or surprise exam requirement, or attend any formal investment adviser compliance training.” Instead, he delegated his responsibilities to a junior level employee, who also lacked compliance experience. In a related action, the SEC also charged senior employees of the audit firm for failing to understand their regulatory responsibilities and violating professional standards.
OUR TAKE: The SEC has increased enforcement where a non-compliance professional assumes the CCO role without relevant compliance experience or knowledge. It may be penny wise, but it could be pound foolish. We strongly advise against senior executives assuming the CCO function unless such person has a compliance background or commits to understanding and undertaking the role.