RIA Compliance Blog
Most deficiencies identified in the course of investment adviser examinations can be remedied by the adviser simply taking corrective measures. This can be true even with regard to deficiencies that are somewhat serious violations, but only if corrective action is taken and sustained.
In 2016, the Securities and Exchange Commission (“SEC”) starkly demonstrated the importance of following through with promises advisers make to the SEC Examinations Staff. Because they did not make promised corrections, Moloney Securities Co., Inc. and Joseph R. Medley, Jr. were forced to consent to the entry of an Order Instituting Proceedings that required them, among other things, to pay civil penalties and to hire an independent compliance consultant to monitor and report certain aspects of the firm’s compliance program.
The SEC’s enforcement case stemmed from a series of examinations conducted by the Office of Compliance Inspections and Examination in 2006, 2009 and 2012. In the earliest examination, the Staff noted as a deficiency that the firm did not have written compliance policies and procedures in place at all. In response to that deficiency, Moloney represented that it would adopt adequate compliance procedures. While it appears that the firm did adopt those procedures, by the time the Staff examined Moloney in 2009, the Staff determined that Moloney did not adequately implement the procedures that it had adopted concerning two general areas – best execution and principal transactions. In response to the deficiencies identified in 2009, Moloney represented to the Staff that it would resolve those deficiencies.
With regard to the principal transactions, the 2009 examination revealed that Moloney did not make adequate disclosures to its clients of Moloney’s capacity as principal in connection with certain client transactions as required by Section 206(3) of the Adviser’s Act. The firm neither disclosed its principal capacity nor obtained client’s consent. In response to the 2009 deficiency, Moloney created a new template form to be used by all of its investment adviser representatives when conducting principal transactions, which form required clients to give Moloney the written consent required by Section 206(3).
By the time of the Staff’s 2012 examination, however, Moloney had not, in fact, implemented the use of the principal transaction template. In fact, according to the consent order, in only one out of fifty-three principal transactions was the form properly completed.
Similarly, in response to the 2006 deficiency, Moloney agreed to establish a Best Execution Committee that would meet periodically to review best execution of the firm. However, by the 2009 examination, the Staff was able to determine that Moloney had not implemented its Best Execution Policies and that the committee did not meet on a quarterly basis or take any minutes of the meetings, all of which was required by the firm’s policy.
Compounding the firm’s problems was that represented to its clients in Form ADV Part 2A, Item 11, that (1) the firm would not act as principal without obtaining client consent, and (2) that its written supervisory procedures contained the best execution obligations and the obligation to obtain client consent for principal transactions. The firm therefore also violated its own policies.
In mitigation, the SEC noted that the firm had reimbursed clients for certain principal transactions that did not comply with Section 206(3). Nevertheless, as a sanction for its repeated failures, the firm and Medley, who was the firm’s Chief Investment Officer, agreed to pay civil penalties of $34,000 and $7,500 respectively. The firm was also required to hire an independent consultant for a period of two years.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.