Repeat Compliance Program Deficiencies Result in SEC Enforcement Actions for Investment Advisers

November 05, 2013

On October 23, 2013, the U.S. Securities and Exchange Commission (“SEC”) issued a press release (Release No. 2013-226) indicating that it sanctioned three investment adviser firms “for repeatedly ignoring problems with their compliance programs.” The SEC’s enforcement actions are the result of the investment adviser firms each failing to effectively act upon previous warnings and correct compliance deficiencies that had been previously identified.  In the press release Andrew Bowden, director of the SEC’s National Examination Program, stated that, “After SEC examiners identified significant deficiencies, these firms did little or nothing to address them by the next examination. Firms must fix deficiencies identified by our examiners.”

Under Rule 206(4)-7 of the Investment Advisers Act of 1940 (“Investment Advisers Act”), SEC registered investment advisers must adopt and implement written policies and procedures that are reasonably designed to prevent securities law violations; designate a chief compliance officer responsible for administering the policies and procedures; and review the policies and procedures at least annually for the adequacy and effectiveness of their implementation. Many state securities regulations also require state registered investment advisers to adopt and implement written supervisory policies and procedures. An investment adviser’s compliance program must be developed and implemented to prevent securities law violations that could harm investors.  In a November 2011 release announcing enforcement actions against three investment adviser firms for violations related to their compliance policies and procedures, Robert Khuzami, former Director of the SEC’s Division of Enforcement, stated, “Not all compliance failures result in fraud, but many frauds take root in compliance deficiencies.” Investment advisers must ensure that they maintain adequate compliance programs to prevent the violations and must test the effectiveness of these compliance programs on an ongoing basis to ensure that they are properly implementing the written policies and procedures that the investment adviser has in place.

Failure to conduct an annual compliance review was among the various deficiencies in all three of the recent enforcement actions. Under Rule 206(4)-7, SEC registered investment advisers are required to conduct reviews at least annually but, regardless of whether it is a requirement or not, it is in every investment adviser’s best interest to conduct periodic reviews. These periodic reviews should be viewed as opportunities for an investment adviser to identify areas in the investment adviser’s policies and procedures where improvements or updates are needed before they result in regulatory deficiencies or violations.  In order to avoid repeat offenses, an investment adviser’s review process should incorporate evaluations and testing of areas where deficiencies were previously identified by the investment adviser or a securities regulator.

On Thursday, November 14, 2013, at 12:00 CST, RIA Compliance Consultants is hosting a webinar “Conducting an Annual Compliance Review,” to further discuss the annual review requirement under Rule 206(4)-7.  During this webinar, our consultants will discuss who should be involved in the annual compliance review process and the purpose of conducting the review. We will also provide practical tips for conducting an annual review and documenting findings. For more information or to register for this event, please click here.

RIA Compliance Consultants can assist investment advisers with conducting their annual compliance reviews through our RIA Express – Compliance Review tool or through a consultant led compliance review.  For more information regarding these services, contact your consultant if you are an existing client or click here to schedule a time to speak with one of our senior compliance consultants.

Posted by Bryan Hill
Labels: Annual Review, Common Deficiencies, Compliance Training