Adviser and its Principals Fined and Censured for Under-Funding Compliance
An investment adviser and its principals were censured and fined a total of $285,000, and its President was barred from acting in a supervisory capacity, for failing to devote sufficient resources to the compliance program. According to the SEC, the President ignored consistent pleas from the firm’s CCO for additional resources, including hiring a compliance consultant, and relief from his other responsibilities to implement an effective compliance program. Consequently, the SEC asserts, the firm failed to conduct annual compliance reviews and allowed multiple compliance violations to continue. These violations included Code of Ethics breaches and selling a higher-cost share class to clients. The CCO had little knowledge or experience in compliance or regulatory matters yet devoted less than 20% of his time to compliance matters because of his other responsibilities. The SEC said that the President chose to under-resource compliance activities and felt that he would deal with any issues if an exam occurred. As part of the settlement, the firm retained a CCO, another employee to help the CCO, an outside compliance consultant, and an outside securities lawyer.
OUR TAKE: Firms should devote no less than 5% of revenues on compliance infrastructure, which should include retaining a CCO (either internally or through a compliance services firm) that has knowledge and experience in compliance and regulatory matters. Compliance officers should note that the SEC did not take action against the CCO, presumably because he had identified the compliance weaknesses and pleaded for more resources.