Adviser Sanctioned for Inadequate Compliance Policies and Procedures

In January 2015, the SEC settled an action against a registered investment adviser who agreed to several findings of violations of the Investment Adviser Act of 1940 including:

  • failure to create and implement an adequate compliance manual
  • failure to conduct an annual review of the compliance policies and procedures
  • failure to conduct “best execution” reviews
  • failure to provide adequate compliance training to firm employees
  • failure to monitor employee personal trading
  • failure to amend their ADV
  • failure to deliver Form ADV to clients
  • failures by the CCO to review marketing materials
  • failure by the CCO to carry out few, if any compliance responsibilities, and having inadequate training and knowledge of the Advisers Act

The SEC also found that despite two examinations, one in 2004 and one in 2007, the firm did not adequately remedy the issues they were alerted to by the Staff. All of these violations were taken seriously by the Commission and resulted in a cease and desist order and a $50,000 civil money penalty.

While this action illustrates numerous compliance failures by the firm and its CCO, we think certain elements of the order are worth highlighting as they are often common situations, particularly with smaller or emerging managers.

First, the SEC found that the firm relied on an off-the-shelf compliance manual template but it had failed to tailor it fully to its business. Second, where the firm did have a policy and a procedure in place, it failed to follow them adequately. Third, the SEC noted the lack of experience and training of the designated compliance officer. The SEC expects firms to appoint a CCO that is “competent and knowledgeable regarding the Advisers Act and should be empowered with full responsibility and authority to develop and enforce appropriate policies and procedures for the firm.” [Specific reference in the final ruling document]  And lastly, there is the issue of not addressing prior deficiencies (which also potentially creates recidivist liability).

Registered investment advisers are required to comply with the Advisers Act Rule 206(4)-7 (the so-called Compliance Rule), the specific requirements of which are outlined below:

  1. Policies and procedures. Adopt and implement written policies and procedures reasonably designed to prevent violation, by the firm and its supervised persons, of the Advisers Act and the rules thereunder;
  2. Annual review. Review, no less frequently than annually, the adequacy of the policies and procedures created and implemented by the firm, and the effectiveness of their implementation; and
  3. Chief compliance officer. Designate an individual (who is a supervised person) responsible for administering the policies and procedures that are created and implemented by the firm.

While Rule 206(4)‐7 does not specifically list the elements that advisers must include in their policies and procedures, those policies should be customized and designed to prevent violations from occurring, detect violations and promptly correct any violations that have occurred. Advisers must monitor their policies and procedures on an ongoing basis and modify/enhance as necessary for any changes in the firm’s business activities and any changes in applicable laws and regulations.

SEC3 can assist your firm in creating, implementing, testing and maintaining your policies and procedures. For further information, please contact your SEC3 representative or contact us at