SEC Judge Says RIAs Can and Should Rely on Compliance Consultants
As SEC Administrative Law Judge has ruled that an investment adviser’s reasonable reliance on an outside compliance consulting firm precluded a finding of scienter (intent to deceive) and dismissed charges that the firm failed to adequately disclose revenue sharing compensation. The ALJ noted that the firm engaged expert compliance consulting firms to assist it with Form ADV’s subjective disclosure requirements including how to disclose compensation received with respect to non-transaction fee mutual funds. Although the ALJ posited that more disclosure may have been required, the ALJ held that the firm’s “reliance on the advice of compliance counsel ‘demonstrates good faith and represents possible evidence of an absence of any intent to defraud.’” (quoting U.S v. Peterson, 376 F. 3d 1136). Reliance on the outside compliance consultant was reasonable so long as “the advice is facially valid” and based on “full and honest disclosure” of facts. Moreover, the ALJ opined that the industry standard of care for investment advisers is “employing a compliance professional and following his or her advice.”
OUR TAKE: As the regulatory world becomes more complicated and threatening, every adviser and broker-dealer should seek outside professional advice to ensure compliance with the ever-expanding regulatory requirements. As the ALJ notes, retaining an outside compliance firm has become the prevailing industry standard.