SEC Initiates Enforcement Action Over Failure to Maintain Required Books and Records

June 29, 2010

Section 31(a) of the Investment Company Act of 1940 (“ Investment Company Act”) requires that each registered investment adviser “maintain and preserve” records of accounts, correspondence, memorandums, tapes, discs, papers, books, and other documents or transcribed information.  These books and records are to be maintained for a period of five years and are subject to random periodic inspection by the U.S. Securities and Exchange Commission (“SEC”).  Likewise, under Rule 204-2 of the Investment Advisers Act of 1940 (“Investment Advisers Act”), the SEC requires certain books and records to be maintained by a registered investment adviser regardless of whether of the investment adviser is associated with a registered investment company. 

A recent example where the SEC has initiated a disciplinary action as a result of a periodic record inspection is In the Matter of Diane M. Keefe.  In this regulatory enforcement action, the SEC brought an action against Diane Keefe, an employee of a registered investment adviser, when the SEC, while conducting a period examination, discovered that Keefe did not maintain accurate records.

Diane Keefe, a former employee of Pax World Management Corp., a registered investment adviser, was found to have willfully violated Section 34(b) of the Investment Company Act for failure to maintain accurate books and records.  Section 34(b) of the Investment Company Act prohibits investment advisors from making any untrue statement of material fact in a document that is required for record keeping pursuant to Section 31(a) of the Investment Company Act.

Keefe served as the portfolio manager of the Pax World High Yield Fund (“Fund”).  The Fund’s filed registration statements state that an Investment Committee was responsible for overseeing the Fund’s investments.  Keefe created handwritten notes that falsely represented that the Investment Committee was overseeing the investments of the Fund.  However, the Fund’s board had never even assembled the Investment Committee.

The administrative law judge suspended Keefe for twelve months from association with a registered investment adviser or broker-dealer.  Keefe has appealed her suspension and the case has been remanded for further fact-finding determinations.

On July 28, 2010 RIA Compliance Consultants will be conducting a webinar on the topic of  maintaining investment adviser required books and records pursuant to SEC Rule 204-2 issued under the Investment Advisers Act.   Individuals can register for this webinar, or any of our other upcoming webinars, by clicking here.

Posted by Bryan Hill
Labels: Books Records, Enforcement, SEC, Webinar