Firm Principal/CCO Barred for Violating Custody Rule
A fund manager’s principal, who also served as the Chief Compliance Officer, was barred from the industry and fined for failing to understand, and comply with, the Advisers Act’s custody rule (206(4)-2). The SEC asserts that the firm, under the control of the respondent, violated the custody rule by keeping certificates in lockboxes and bank and brokerage accounts under the respondent’s control, failing to properly engage a surprise third party audit, and failing to understand which securities fell within the custody rule. The SEC faults the respondent for not having knowledge of the rule “that would be expected of a compliance professional.” Before re-applying to the SEC, the respondent will have to certify that he completed at least 30 hours of compliance training.
OUR TAKE: Ignorance of the law is no excuse. Registered investment advisers must retain a qualified and knowledgeable compli-pro (internally or externally) to execute a reasonable compliance program. The SEC will not give a pass for technical violations even though most firm leaders will not know or understand the esoteric minutiae of the custody rule. A firm leader that blithely assumes compliance responsibility puts the firm franchise at risk.