Rogue Brokers Continue to Sell Unauthorized Private Fund for 14 Years
The SEC fined and censured an investment adviser $450,000 and fined and barred a supervisor for failing to stop two rogue brokers from selling an unauthorized private placement for which they received commissions. According to the SEC, the brokers sold the fund using the firm’s offices and the firm’s client reporting system to over 125 clients over a 14-year period that the conduct went undetected. The SEC faults (i) the firm for failing to adopt reasonable policies and procedures governing the use of its client reporting system and (ii) the supervisor for allowing the brokers to select which files to be reviewed every year rather than a random sample.
OUR TAKE: Firms should not allow manual changes to client reporting documents. We also counsel against allowing reps to sell or service securities not housed on the firm’s own platform. Firms also must ensure that supervisors don’t “go native” with those they supervise by allowing them to essentially supervise themselves by selecting the documents for review.