Compliance Program Sanctions Made to Three IA Firms Under SEC Initiative

Enforcement actions by the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), and other US regulatory bodies continue at a steady pace in the fourth quarter of 2013, as the SEC announced in late October that as part of their ongoing Compliance Program Initiative they’ve sanctioned three investment advisory firms, along with their principal owners and Chief Compliance Officers, for continuous failure to act upon warnings of compliance deficiencies issued by the SEC in prior examinations. The Compliance Program Initiative began in 2011 and is focused on pursuing “firms that have been previously warned by SEC examiners about compliance deficiencies but failed to effectively act upon those warnings.”

The press release issued by the SEC reflected that Equitas Capital Advisers LLC, Equitas Partners LLC, (“Equitas”), and Modern Portfolio Management, Inc. (“Modern”) could have avoided the sanctions, which include steep financial penalties and the mandatory hiring of compliance consultants, had they simply addressed the compliance deficiencies and not ignored them. The deficiencies noted were that Modern failed to “complete annual compliance reviews” in 2006 and 2009, as required under Rule 206(4)-7 of the Investment Advisers Act of 1940, and also made “misleading statements” about the firm’s assets and other information on their website and in brochures. Equitas, on the other hand, “failed to adopt” adequate written policies and procedures (P&Ps), made false and misleading disclosures, and repeatedly billed clients incorrect fee amounts. They also failed to disclose the deficiencies in responses to due diligence questionnaires and requests for proposals. The SEC further sanctioned the former owner and CCO of Equitas for a number of violations, including inflation of assets under management, overbilling clients at the firm he started upon leaving Equitas, and removing nonpublic client information from Equitas without obtaining required permits.

Through these enforcement actions, the SEC continues to send the message that investment advisory firms must adhere to all requirements under Rule 204(6)-7 and perform reviews and testing to ensure that they have strong compliance programs in place.

For more information, or for assistance on other compliance topics, please contact us at (619) 278-0020 to schedule a consultation.

GENERAL DISCLAIMER: Information contained within this blog does not create a business-client relationship, and none of the content of this blog can be deemed to be consultive business advice.

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