Firm Principals Prosecuted for CCO’s Wrongdoing

The SEC barred and fined the 2 principals of a registered investment adviser for failing to properly supervise the firm’s Chief Compliance Officer, who was indicted for misappropriating client assets.  The SEC asserts that the respondents “did nothing…to ensure that [the CCO] carried out his responsibilities” and “never provided any funding, training, or resources to support” the CCO.  Specifically, the SEC alleges that the respondents failed to ensure (i) compliance with the custody rule by confirming that a surprise custody exam occurred, (ii) that the CCO implemented relevant policies and procedures, and (iii) that the firm performed annual compliance reviews.  The SEC asserts violations of the compliance rule (206(4)-7), the custody rule (206(4)-2), and the supervision rule (203(e)(6)).

OUR TAKE: Firm principals do not absolve themselves of compliance responsibility by simply hiring a Chief Compliance Officer.  They must continue to supervise the CCO to confirm proper implementation (and prevent wrongdoing) while also ensuring that the compliance function has sufficient resources and support.