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August 31, 2015 at 08:00 PM
On June 23, the Securities and Exchange Commission entered into a settlement with a large Chicago-based investment advisor and certain of its principals. The key allegations made by the SEC were that “the firm had failed to implement and enforce provisions of its policies and procedures and code of ethics.” Further, the SEC alleged that the firm’s president failed to dedicate sufficient focus and resources to compliance matters, which directly led to the compliance failures at the firm.
The firm has been registered with the SEC since 1989 and manages approximately $1 billion in assets under management. Most of the firm’s clients are high-net-worth individuals. The firm also manages a mutual fund with nearly $280 million under management.
The firm’s chief compliance officer filled a variety of roles, including backup trader, backup trade reconciliation, research analyst and portfolio manager for several separately managed accounts. The CCO had little to no experience or training in compliance and was asked by the firm’s president to take on the executive position after the previous CCO retired. However, the president failed to provide the CCO with training, staffing or funding to implement the compliance function.
As a result of the president’s decision making and allocation of resources, the firm was unable to complete annual compliance program reviews for several years. When the CCO notified the president that the firm would not be ready for an SEC audit, the president replied, “The firm’s primary responsibility was serving clients […]. They could address any problems that came up in an [SEC] examination at that time.”
Eventually, the SEC came to visit and uncovered an array of rules violations. Among those violations were: failure to have trades pre-cleared by the CCO; failure to collect employee personal transaction and holdings reports; failure to conduct or maintain best execution reviews; failure to review and abide by the firm’s Code of Ethics; and placing certain clients in investor share classes of the mutual fund when they were eligible for the institutional share class.
