Failure to Heed Compliance Consultant’s Recommendations Results in Enforcement Action

The SEC fined and censured a wrap sponsor for double-charging clients on products in its wrap program even though a compliance consultant had twice warned the firm to change its practices.  According to the SEC, the respondent told clients that it would not charge wrap fees if the client chose to pay commissions through an affiliated broker on purchases of certain BDC and REIT securities.  The SEC asserts that the firm assessed over $34,000 in such fees over a 2-year period.  Although the firm’s compliance department was responsible for monitoring how fees were charged, the SEC, based on the compliance consultant’s findings, alleges that the compliance function did not have sufficient human or technology resources to adequately monitor fee calculations.

OUR TAKE: Listen to your compliance consultant especially when the recommendation includes additional resources for a particular compliance weakness.  Otherwise, the regulator will assume you lack the proper compliance “tone at the top” that regulators require.