SEC Sanctions Investment Adviser for Failure to Devote Resources to Compliance Function

The SEC recently settled a proceeding brought against an investment adviser firm, its former President, and other principals at the firm where the compliance function was not adequately staffed and not adequately resourced. An independent compliance consultant and the SEC staff subsequently identified a number of compliance violations during an examination of the firm that had not been previously detected by the firm or its Chief Compliance Officer.


Many of the SEC’s findings are worth highlighting:

  • The SEC found that the President had promoted the CCO to that role, knowing the CCO had limited prior experience and training in compliance; that the CCO still retained his previous functions, including backup trader, backup trade reconciliation, research analyst, and portfolio manager; and that he failed to provide the CCO with sufficient guidance regarding his duties and responsibilities as the new CCO.
  • The SEC found that the CCO lacked the experience, resources, and knowledge as to how to adopt and implement an effective compliance program or how to conduct a comprehensive and effective annual compliance program review. Indeed, the firm failed to conduct the required annual compliance reviews several times, and there was a three-year gap between annual reviews.
  • Nevertheless, the CCO was able to learn certain aspects of the CCO role from the former CCO and from attending a compliance conference, and he identified certain weaknesses in the firm’s compliance program and he began to implement new compliance policies and testing.
  • The SEC found the President did not make the compliance program a priority for the firm. He directed the CCO to prioritize his investment research responsibilities over compliance, and also gave him other responsibilities, including naming him CFO.
  • Between his research and other responsibilities, the SEC found that the CCO was only able to devote between 10% and 20% of his time on compliance matters.
  • The CCO told the President on multiple occasions that he needed help to fulfill his compliance responsibilities, including the annual compliance program review. However, the President told the CCO that the firm’s primary responsibility was serving clients, and that they could address any problems that came up in an SEC examination at that time.
  • The firm eventually engaged a compliance consultant to assist the CCO, primarily because the firm needed an annual review for the board of a mutual fund that the firm advised, and they needed the compliance consultant to handle the annual review.
  • Nevertheless, the President narrowed the scope of the compliance consultant’s engagement from a more comprehensive compliance review, in part to reduce the cost of the engagement.
  • The compliance consultant issued a report that enumerated several compliance deficiencies at the firm. Shortly thereafter, the SEC exam staff conducted an examination and cited the firm for several compliance deficiencies, most notably the failure to conduct annual compliance program reviews and code of ethics violations surrounding personal trading accounts.
  • Subsequently, the CCO stepped down as CCO and remained as CFO. The firm hired a new CCO with compliance and operations experience.

Based on these and other findings, the SEC found the firm willfully violated the Advisers Act, and the firm and certain principals agreed to cease and desist orders and the payment of monetary damages.

The SEC, in agreeing to accept the settlement offer, noted the firm’s remedial efforts, which included:

  • The firm expanded its relationship with its outside compliance consultant and hired an additional full-time Compliance Director to support the firm’s CCO.
  • The firm has continued to retain a compliance consultant as an additional compliance resource and to ensure that the consultant will monitor and advise on the firm’s annual compliance program reviews.
  • The firm hired a new CCO.


Our Perspective

While many of the specific factual findings may strike some readers as being egregious, in our experience many firms do struggle in trying to find the right level of experience, resources and independence for their CCOs and their compliance obligations.

It is also common, particularly with smaller advisers, that many CCOs have other, non-compliance roles with substantive and substantial duties.

Many of these “dual hatted” CCOs also have specific expertise in those other, non-compliance areas, and may feel challenged to find the time or acquire the expertise to discharge their compliance duties in the way the SEC and investors would expect.

Another factor in this case that we encounter sometimes is the lack of a “compliance culture”, or “tone from the top”, which can manifest, as in this case, in a variety of ways, such as failing to appreciate the importance of the compliance function; or prioritizing non-compliance functions over compliance functions; or not allocating appropriate resources to compliance functions.

Another compliance violation that we see frequently is the failure to conduct the required annual compliance review. Whether it is due to time or resource constraints, or having other priorities, it is important for registered investment advisers to remember that the annual compliance review is a legal requirement and there are potentially significant consequences for overlooking this obligation.

Finally, we find it noteworthy that the facts in this case date back a few years. The current regulatory environment emphasizes “broken windows”, enforcement actions, record penalties, and “message cases”. There is also enhanced focus on CCOs as “gatekeepers”, and on CCO liability. We have also previously noted whistleblower awards now being paid out to compliance personnel. Thus, we would not be surprised if the SEC continues to focus on firms’ CCOs, and their compliance efforts and resources.

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