SEC Blames Compliance Program for Allowing Unlawful Fund Transfers
The SEC has sanctioned a hedge fund manager and has brought charges against its chief compliance employee for failing to adopt reasonable compliance policies and procedures, thereby allowing the employee to misappropriate funds. The SEC asserts that the employee was responsible, without supervision, for all internal operations including portfolio management and compliance. The SEC alleges that the employee withdrew money from the fund in excess of the management fees and misappropriated the funds for his own purposes. The SEC faults the firm for failing to implement reasonable policies and procedures to supervise withdrawals and check the employee’s activities. The SEC also indicates that the firm failed to obtain compliance certifications or conduct annual reviews. The firm agreed to waive fees until clients were reimbursed, notify clients, and pay a penalty.
OUR TAKE: A quality control environment must include policies and procedures that prevent movement of funds without approval by a second person. Also, firms must implement the basics of a compliance program including the annual review and certifications.