- Failure to Correct Compliance Program Deficiencies Results in Enforcement Actions Against Three Investment Advisers
- October 31, 2013 | Authors: Michael G. Dana; Peter D. Fetzer; Terry D. Nelson
- Law Firms: Foley & Lardner LLP - Miami Office ; Foley & Lardner LLP - Milwaukee Office ; Foley & Lardner LLP - Madison Office
On October 23, 2013, the SEC announced enforcement action against three registered investment advisers for repeatedly failing to adequately address compliance problems (http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540008287).
The three firms, Modern Portfolio Management, Inc., Equitas Capital Advisers and Equitas Partners LLC all agreed to settle the SEC’s respective enforcement proceedings by each paying financial penalties and engage compliance consultants to help fix the compliance problems.
The action against the three firms are a result of the SEC’s Compliance Program Initiative which is geared to re-examination of registered advisers who have been previously advised by the SEC that they need to fix compliance programs. Upon re-examination, each of the three firms was found to have failed to adequately respond to the SEC’s prior warning about fixing the problems. The lesson learned is that advisers need to fix compliance deficiencies, especially after they have been advised by the SEC to do so.
Under Rule 206(4)-7 of the Investment Advisers Act of 1940, registered investment advisers are required to have written policies and procedures designed to prevent violations of the Advisers Act and relevant securities laws. In addition, such advisers are required to complete an annual inspection of the policies and procedures to ensure that they are kept up-to-date and are effective.
In the SEC’s order against Modern Portfolio Management and its owners, the SEC found that they failed to correct compliance deficiencies in spite of past warnings from the SEC examiners. They failed to complete the annual review of the firm’s compliance policies and procedures over several years and made material misstatements on its website and Form ADV Part 2 brochure. Among other things, the adviser’s website reported assets under management far greater than what was reported within its Form ADV. The adviser and its owners agreed to be censured by the SEC and pay penalties of $175,000. In addition, they agreed to replace their chief compliance officer and to engage an outside compliance consultant for a three year period.
In the SEC’s action against Equitas Capital Advisers and Equitas Partners and their owner and chief compliance officer, the SEC found that they failed to adopt adequate written policies and procedures and conduct annual compliance reviews over several years. In addition, it was found that they made false and misleading statements to clients and prospective clients about historical performance, compensation and conflicts of interest, and repeatedly overbilled (and even underbilled) clients. The firms agreed to reimburse all overcharged clients, pay a total of $225,000 in additional penalties, agreed to an order of censure and to hire independent compliance consultants. The firms are also required to inform clients about the SEC’s enforcement actions.