Flouting Compliance: A New York-Based Investment Advisory Firm Charged by the SEC

On March 7, 2019 the Securities and Exchange Commission (SEC) filed a cease-and-desist order against a New York-based Investment Advisory Firm (the “Firm”) and its sole proprietor for numerous violations related to:

  • The Compliance Rule
  • The Custody Rule
  • The Books and Records Rule


The SEC alleges that the defendants made material misstatements on multiple annual Forms ADV, which were signed and directed to be filed by the sole proprietor.

Falsifications of Form ADV

The SEC’s order states that  on the Firm’s Form ADV included statements to the effect that they were not in custody of client assets and that they had “improperly designated certain individuals as chief compliance officers (CCOs) on the Firm’s Form ADV who apparently had no knowledge of being charged with the responsibilities of the Firm’s CCO.

Violation of the Custody Rule

The SEC also states in the order that the defendants were in custody of client assets for a period of at least 10 years, dating back to July 2005, and failed to take any steps to comply with the Custody Rule including failing to retain an independent CPA to carry out the necessary annual surprise audit of the Firm’s Private Fund; failure to distribute audited financials to the Fund’s investors in a timely manner; and failure to have an independent public accountant conduct a surprise audit of the assets of the Trust.

No Required Books and Records

The order also highlights  that the defendants failed to keep required books and records in accordance with Rule 204-2 for a period of at least 11 years, dating back to the inception of the Firm, including failure to keep a current and accurate journal of cash receipts and disbursements; a ledger of the Firm’s assets, liabilities, reserves, capital, income, and expense accounts; records of the Firm’s policies and procedures; copies of the Firm’s annual reviews; and acknowledgement from the sole proprietor and or the CCO that the Firm’s books and records are in good order.


“Blatant Disregard” for Compliance Rules

The sole proprietor’s method for staying informed of regulatory compliance issues was reviewing compliance bulletins published by the SEC and took no further action to educate himself regarding compliance codes.

The Firm also failed to:

  • Adopt and implement any written compliance policies and procedures required by the Advisers Act
  • Conduct required compliance reviews

The order states:

“In short, Respondents made no effort to satisfy multiple important aspects of their compliance obligations until the SEC’s examination staff initiated an examination…in November 2015. Instead, Respondents blatantly disregarded key statutes and rules that apply to SEC-registered investment advisers.”

The complete SEC order is available here.

Creating a Culture of Compliance

This case demonstrates that a culture of compliance is of paramount importance and the SEC will take action when compliance rules are ignored.

Needless to say, a Firm’s policies and procedures need to be in place prior to being contacted by any regulatory bodies, but it is also  is of critical importance that your firm create a culture of compliance by clearly prioritizing knowledge of the compliance requirements; awareness of changes in the regulatory landscape announced through various press releases, risk alerts, and exam priorities; and the discharging of relevant obligations under the Adviser’s Act and applicable state regulations.

When in doubt, there are actions your firm can take to train and educate your employees to guide your compliance efforts, including:

  • Attending training events on investment advisory compliance issues that are offered by the SEC or other regulatory agencies
  • Reviewing guidance on investment advisory compliance issues available on the SEC’s website
  • Contacting the SEC’s staff for guidance regarding any investment advisory compliance issues
  • Seeking professional legal guidance

Enforcement may be the result of failing to properly administer your Firm’s compliance policies and procedures and educating your firm’s employees on compliance.

If you have any questions, concerns, or require assistance regarding compliance at your firm, or if you need assistance in developing the required policies and procedures to remain in compliance with regulations, we’re here to help.

Contact Core Compliance & Legal Services now

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