Adviser and its CEO/CCO Routed Trades through Affiliated Broker
An adviser and its CEO/CCO will pay over $600,000 to settle charges that they routed advisory client orders through an affiliated broker-dealer without client notice and consent. The firm will also be required to notify all clients of the enforcement order and hire an independent consultant. According to the SEC, the firm used collected mark-ups on fixed income securities by buying the securities through a broker-dealer under common control with the adviser and then selling the securities directly to clients. The SEC alleges that the firm never disclosed such transactions or obtained consent, as required by the Advisers Act. The SEC says that the firm failed to follow its own compliance policies and procedures. The SEC charged the CEO/CCO for causing violations of the compliance rule (206(4)-7) by not carrying out his responsibilities.
OUR TAKE: A compliance manual is not a compliance program. Firms must actually implement the policies and procedures at an operational level. Also, we strongly recommend against a senior executive such as a CEO acting as Chief Compliance Officer because most such C-suite execs lack the requisite regulatory experience or time to implement and test the procedures. Additionally, as this case shows, such execs sometimes have an inherent conflict of interest where their revenue goals may conflict with their compliance obligations.