IA/BD Failed to Supervise Its CEO/CCO
The SEC fined and censured an IA/BD for failing to supervise its CEO/CCO who was ultimately criminally convicted of stealing from clients. The CEO/CCO used the firm’s consolidated reporting system, which allowed manual inputs of outside investments, as a way to mislead clients about false investments that he siphoned off into his own account. The SEC faults the firm for failing to implement reasonable policies and procedures to review the consolidated reports, which, according to the SEC, would have quickly uncovered the obvious scheme. The SEC charges violations of the antifraud rules and the compliance rule (206(4)-7), which requires firms to adopt and implement reasonable compliance policies procedures to prevent violations of the securities laws.
OUR TAKE: It’s never good when the CEO (or any other revenue-producing individual) also serves as the CCO. Such a structure virtually ensures a lack of proper supervision. Firms must ensure that the CCO, whether inside or outsourced, has significant independence from management and the revenue-producing function. The SEC has brought several enforcement actions against dual-hatted CCOs, who also serve in a management capacity.