SEC Cracks Down on RIA, BD Compliance Officers--Compliance Watch

Former SEC examiner says CCOs 'need to be more forceful' in bringing concerns to superiors

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  • Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law.  The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
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A former SEC examiner is warning chief compliance officers (CCOs) at advisory firms and broker-dealers that two recent cases brought by the Securities and Exchange Commission (SEC) against CCOs is a sign that “both the CCOs and the firms themselves need to realize how vulnerable they are and their degree of liability,” says Amy Lynch, founder and president of FrontLine Compliance. CCOs, Lynch says, need to be more forceful in bringing items of concern to the attention of their superiors.

CCOs have “one of the toughest jobs there is,” says Lynch, whose firm has offices in Leesburg, Va., and New York. CCOs perform a balancing act-- “they need to keep their distance so they are the cop on the beat, but not be adversarial so they can communicate with the managers,” she says. “If they can’t communicate, how will they know what is going on?”

The SEC and the Financial Industry Regulatory Authority (FINRA) are both “being much more strict in their compliance,” Lynch adds. Now that the SEC has received a budget boost from Congress, the agency is “going to enforce its powers more than ever.” The SEC’s staff “is growing…and I think [the SEC] will continue to try to hire more experienced staff.”

Specifically, Lynch points primarily to two SEC administrative actions taken in May against dually registered advisors and broker-dealers--Aletheia Research and Wunderlich Securities Inc.

In addition to censuring the firms, the SEC took action against the firms’ principals, including their CCOs, and reprimanded them for violations to the Investment Advisers Act that continued even after the SEC and a consultant warned them that they needed to comply.

In Aletheia, the SEC found against Roger Peikin and assessed him a $100,000 penalty, noting he was Aletheia’s CCO during the relevant period. Peikin is also the company’s co-founder.

The SEC order cited Altheia for sending proposals to clients and potential clients that failed

to disclose requested information regarding prior SEC examinations, which Peikin reviewed between 2006 to 2008.

The agency cited both the firm and Peikin for failing to implement written procedures designed to prevent violations of the Advisers Act and stated that from 2005 through 2009, Aletheia, the firm's CEO and CCO Peikin failed to make and/or keep copies of employees’ acknowledgments indicating they had received copiet of Aletheia’s code of ethics even after receiving 2005 and 2008 deficiency letters notifying Aletheia of that requirement.

The SEC also had problem's with the compan's hedge fund compliance: the firm, the CCO and the CEO (Peter Eichler, Jr.) failed to have an annual surprise examination of Aletheia’s hedge funds and to provide their hedge fund investors with quarterly account statements, or provide the hedge fund investors with timely annual audit reports for a five-year period.

As for Wunderlich, the firm was found to have overcharged advisory clients for at least three years; failed to satisfy the disclosure and consent requirements of Section 206(3) of the Advisers Act when engaged in principal trades with advisory clients; failed to adopt, implement and review written policies and procedures; and failed to establish, maintain and enforce a written code of ethics, even after a consultant told them they needed to do so.

The SEC pointedly stated that Tracy Wiswall, the CCO of Wunderlich’s brokerage and advisory businesses from 2004 until at least 2009, along with founder Gary Wunderlich, Jr., “willfully aided and abetted and caused WSI’s violations relating to its written policies and procedures and written code of ethics.” SEC language directed at the CCO rarely gets stronger than this: “Wiswall was a cause of WSI's violations relating to the firm's principal trades with advisory clients,” it stated. 

Wiswall had hired a compliance consultant beginning in July 2007 to help the firm comply with the Advisers Act. But by April 2008, when the exam staff arrived to conduct the first review of WSI's advisory operations, neither the firm nor Wiswall had implemented written compliance policies and procedures or distributed a written code of ethics, the SEC found.

Wiswall’s civil monetary penalty was $50,000, a little more than Wunderlich’s, in addition to the firm’s disgorgement to clients.

“It used to be," says Lynch, that repeat violations may or may not have resulted in enforcement actions, but now she says the SEC is much more likely to do. That's the case, she says, especially if "they are numerous enough or egregious enough to warrant harm to investors." When that is the case, it's likely to "result in disgorgements to clients and easily result in enforcement.”

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