Last fall, the Securities and Exchange Commission (SEC) announced that investment advisor compliance is a heightened priority in 2014. In an October 2013 speech before the National Society of Compliance Professionals in Washington DC, SEC Chairperson Mary Jo White delivered the following charge to Registered Investment Advisor (RIA) compliance experts:
“You are on the front lines, working day in and day out in an effort to prevent people from cutting corners, stepping over the line, and violating the securities laws and regulations. The simple fact is that when firms do not implement and enforce a comprehensive set of policies, procedures, and systems to govern and supervise their employees, it increases the likelihood that an investor somewhere will be harmed.”
Pointing to the SEC’s limited personnel, White characterized the SEC’s reliance on RIA compliance professionals as a “critical line of defense.” White noted that the “culture of [investment advisor] compliance must be set and lived at the very top,” and that the role of
compliance personnel, in terms of standing, authority and resources must be “woven into the fabric of the [investment advisor] firm.”*
SEC Takes Swift Action
One day after White’s speech the SEC announced it had settled enforcement actions against three RIAs. These three enforcement actions arose out of the SEC’s Compliance Program Initiative, targeting firms that previously had been warned about compliance program deficiencies.
A review of the SEC Cease‐and‐Desist Orders reveals the following unresolved deficiencies uncovered by the SEC during its examinations:
- – Misleading fund performance statements through model results that did not deduct advisory fees;
- – Chief Compliance Officer unfamiliarity with SEC guidelines governing performance advertising;
- – Misleading website statements regarding exclusive access to certain funds;
- – Overbilling and under‐billing of certain clients;
- – Insufficient written supervisory procedures;
- – Inadequate disclosure of compensation generated from recommending investments in certain funds;
- – Negligent and misleading disclosures about historical performance, compensation, conflicts of interest and prior examination deficiencies; and
- – Lack of annual compliance reviews as required by the Investment Advisers Act of 1940 and maintenance of written compliance policies and procedures.
The relief imposed by the SEC included censure of the firms and their owners, mandatory compliance training, mandatory retaining of compliance consultants, mandatory appointment of new chief compliance officers, one‐year posting on firm website of a notice of violations, and payment of civil monetary penalties.
*The full text of SEC Chair White’s speech is published on the SEC’s website.
Results for RIAs
RIAs must be prepared for the SEC’s elevated efforts to uncover compliance deficiencies. Specifically, RIA’s should staff enough qualified compliance personnel to ensure that effective compliance controls are developed, implemented and monitored. Creating a top‐down “culture of compliance” should be a top priority, including conducting internal audits, training unit managers in compliance issues, and encouraging all employees to internally report potential unresolved compliance issues. In addition, RIA’s must swiftly remedy deficiencies and make a concerted effort to learn from past mistakes as well as the mistakes of others. The learning process should include an ongoing review of published SEC Cease‐and‐Desist Orders and risk alerts. As explained by Chair White during her speech in Washington DC, “the risk alerts lay out the most frequent instances of non‐compliance observed during SEC examinations, whether as a result of intentional acts or misunderstandings about what the rules require.”