SEC Alleges that CCO Failed to Verify AUM and Filed False ADV
The SEC has commenced enforcement proceedings against the Chief Compliance Officer of an investment adviser for failing to verify assets under management that he reported on Form ADV. The SEC also filed charges against the advisory firm, its Chief Operating Officer, and the CCO’s consulting firm. The SEC faults the CCO for filing a Form ADV based on AUM obtained from the Chief Investment Officer whom the CCO “knew had little to no involvement with the Registrants’ investment advisory accounts.” According to the SEC, the CCO failed to “personally review” the adviser’s records to verify AUM and the number of advisory accounts. The ADV reported AUM as $182 Million and 1200 client accounts, but the SEC alleges that the firm had only $62 Million in AUM and fewer than 300 clients. The SEC asserts that the CCO “collected the information from the CIO only hours before the filing deadline, and knew from the CIO’s message that the information was only intended to be an estimate.” The SEC also charges the firm with books and records violations for failing to segregate the adviser’s financial records from its parent company.
OUR TAKE: A CCO should not blindly rely on information provided by firm management, especially if he/she has a reasonable belief that such information may not be reliable or accurate. Firms and CCOs must ensure a high level of compliance engagement that includes a robust testing program.