The Securities and Exchange Commission has suspended for 12 months an advisory firm’s former president from acting in a supervisory capacity after he consistently ignored pleas from the firm’s chief compliance officer for help.
The firm, Pekin Singer Strauss Asset Management, and two of its principals were also censured and fined $285,000 for compliance failures.
Chicago-based Pekin, which has approximately $1.07 billion in assets under management and predominantly serves high-net-worth clients, also serves as investment advisor to Appleseed, a registered open-end investment company with net assets of approximately $280 million. The SEC’s action also alleges that Pekin breached its code of ethics by failing to put clients into a lower-cost class in the Appleseed Fund the firm managed.
In 2009 and 2010, the SEC order states that Pekin’s former president, Ronald Lee Strauss, failed to make the compliance program “a priority for the firm” by directing the CCO “to prioritize his investment research responsibilities over compliance.”
Strauss, 75, resides in Wilmette, Illinois. From 2004 until June 30, 2014, he served as president of Pekin Singer. On June 30, 2014, Strauss retired as president and now serves as a senior advisor at Pekin Singer and is a member of Pekin Singer’s Board of Directors.
During his time as president, Strauss also gave the CCO other duties at the firm that impacted his ability to focus on compliance, including naming him CFO in 2009.
“Between his research and other responsibilities, the chief compliance officer was only able to devote between 10% and 20% of his time on compliance matters,” the SEC's order states.
As a result, the CCO—who had little knowledge or experience in compliance or regulatory matters—was unable to complete timely annual compliance program reviews for 2009 or 2010, with nearly three years passing between Pekin Singer’s completion of its limited annual compliance program review in early 2009 and the completion of the next annual review in late 2011.
Throughout 2009 and 2010, “Pekin Singer did not adequately evaluate the effectiveness of its compliance policies and procedures and code of ethics or test the firm’s implementation,” the SEC’s order states.
In 2009 and 2010, the CCO told Pekin’s president on “multiple occasions” that he needed help to fulfill his compliance responsibilities, including the annual compliance program review. However, those concerns went unheeded.
The SEC said that the president chose to under-resource compliance activities and felt that he would deal with any issues if an exam occurred.
“Pekin Singer Strauss takes its compliance obligations very seriously, and we cooperated fully with the SEC to reach this settlement,” said Adam Strauss, Pekin Singer Strauss co‐CEO, in a statement shared with ThinkAdvisor. “Our clients were not adversely affected financially by these compliance deficiencies. Furthermore, since 2011, the firm has significantly enhanced its compliance function and completed timely annual compliance reviews.”
The firm retained a compliance consultant and legal counsel in 2011, prior to the SEC’s routine exam, and hired a compliance officer in 2012.
The SEC order also states that from 2011 to early 2014, Pekin Singer placed clients in the investor share class of Appleseed Fund, a mutual fund managed by Pekin Singer, when those clients were eligible for the less expensive institutional share class.
“Pekin Singer clients paid an additional 25 basis points in fees on their Appleseed shares beyond what the clients would have paid had they been invested in the less expensive share class,” the SEC states. “Pekin Singer received the additional 25 basis points in Appleseed fees generated by having Pekin Singer clients in the more expensive share class.”
Co-CEO Strauss said in the statement that Pekin Singer “fully and voluntarily remediated the investor share class matter. We converted all separately managed client shareholdings to the institutional class shares, notified affected clients, self‐reported the matter to the SEC and voluntarily and proactively reimbursed clients for the expense ratio difference. The difference in expense ratios represented an average of less than $91 per client portfolio per year."
He added: "Our compliance team identified the issue and the firm proactively corrected it.”
Cipperman Compliance Services advises advisory firms to devote “no less than 5% of revenues on compliance infrastructure, which should include retaining a CCO (either internally or through a compliance services firm) that has knowledge and experience in compliance and regulatory matters.”
The SEC did not take action against the CCO, “presumably because he had identified the compliance weaknesses and pleaded for more resources,” Cipperman says.