Adviser Ignored Its Own Compliance Policies, Failed to Stop Misappropriation
The investment adviser affiliate of a large broker-dealer agreed to pay a $1.75 Million fine and retain an independent consultant for failing to stop a third party adviser from misappropriating client assets.
The third-party adviser, who utilized the respondent’s asset management programs, stole from clients by having them wire money to an account he controlled. The wires set off red flags in the respondent’s compliance systems, but the firm failed to act. According to the SEC, AML analysts ignored multiple alerts emanating from a surveillance system designed to track suspicious activity. The SEC also asserts that the firm failed to follow its signature policies for client disbursements. The firm also failed to confirm disbursement requests with clients. The SEC argues that the firm could have stopped the misappropriation had it followed its own policies. The SEC charges the firm with failing to adopt a reasonable compliance program under the compliance rule (206(4)-7).
One of the central policy arguments in favor of compliance programs is that they can insulate a company from liability in the event of third party wrongdoing. But, that argument only works if the company adopts a reasonable compliance program, implements it, and then follows it. Ignoring your own policies makes an easy case for the SEC Enforcement Division.
Read SEC Order here.