Fund Administrator Charged for Weak Compliance Procedures
The SEC has charged a fund administrator that provided compliance services with causing violations of the auditor independence rules by failing to implement reasonable policies and procedures. The SEC alleges that a director had an undisclosed consulting relationship with the fund auditor’s affiliate. The SEC asserts that the fund administrator violated the compliance rule (38a-1) because it used D&O questionnaires that focused on the director independence rules rather than the auditor independence requirements and for failing to adequately train directors. The SEC also charged the auditor with improper professional conduct and the director for failing to disclose the relationship.
OUR TAKE: When a compliance violation occurs, the SEC will seek charges against all parties involved. This case applies a strict liability standard because it is unclear that training or a better D&O questionnaire would have disclosed the relationship between the director and the audit firm.