RIA Compliance Blog
The Securities and Exchange Commission Enforcement Division last week settled enforcement actions against three mid-sized registered investment advisors for failing to establish, maintain and follow written compliance procedures. Two of the firms had assets under management less than the new $100 million cutoff for federal registration, and the other firm’s assets were just over that amount.
OMNI Investment Advisors, Inc., was a two-advisor firm with 190 accounts and $65 million under management. The SEC found that it had no compliance program in place for over two years, during which time the owner and CCO was out of the country and not actively engaged in the firm’s business. When the SEC announced an examination of the firm in late 2010, the firm apparently purchased an “off-the-shelf” compliance manual designed for both broker-dealers and investment advisors, but did not customize it for its own advisory business. No annual compliance reviews were conducted, and the firm’s advisors were apparently not supervised. The firm’s owner was also found to have backdated and failed to review a number of documents containing his signature, including client advisory agreements. As a sanction, the SEC barred the firm’s owner from the securities industry and fined him $50,000, in addition to censuring the firm.
Asset Advisors, LLC, a six-employee, $27 million firm in Michigan, had a written set of procedures, but rarely used or updated them. The Chief Compliance officer, who was also the firm’s owner, had engaged in minimal compliance training and only sporadically reviewed compliance policies with the staff. The firm also failed to periodically review its policies and procedures, and failed to observe its own code of ethics. The SEC censured the firm and fined it $20,000.
The third firm, Feltl & Company, Inc., is a Minnesota-based broker dealer and investment adviser with slightly over $100 million dollars under management in 547 wrap fee accounts. The SEC’s order focused on the firm’s failure to adequately notify its customers of the firm’s position in over 1,000 principal trades and of supervisory lapses in connection with those trades. In addition, the SEC criticized the firm for its lack of attention to compliance requirements in its advisory business. The SEC noted the fact that the compliance manual was purchased “off-the shelf,” and that only four of its pages were devoted to the firm’s advisory business. The firm also failed to develop a Code of Ethics until the SEC was in the process of conducting an examination, and it did not implement the Code for nine additional months.
The monetary sanctions against Feltl totaled more than $200,000, including both disgorgement of undisclosed and overcharged commissions and a fine. In addition, the firm was required to hire and maintain, for two years at its expense, an independent compliance consultant to prepare prepare quarterly compliance reports for the firm, with recommendations that the firm is obligated to adopt.
It is apparent from these cases and from other recent SEC initiatives that the SEC is now looking not only at large firms with large problems, but also at smaller firms with issues which might not have been considered significant in the past. In addition, the SEC is indicating that it expects those firms to be diligent in establishing, maintaining, following and regularly reviewing a carefully designed set of written compliance policies and procedures. Simply having a boilerplate compliance manual on the bookshelf will not be sufficient to avoid SEC scrutiny and sanctions. Most state regulators also have similar requirements and expectations.
As many mid-sized advisers switch from SEC to state registration, the cases serve as a reminder that the SEC retains jurisdiction over many aspects of adviser operations, including the compliance requirements of rules promulagted under Section 206(4) of the Investment Advisers Act of 1940. Simply because they do not have SEC registration obligations, small and mid-sized advisers remain on the SEC enforcement radar screen – and the recent settlements of these three cases are striking evidence of that fact.
Parker MacIntyre is an Atlanta, Georgia based law firm that provides legal and compliance services to investment advisers, including mid-sized and state-registered advisers.