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Regulation and Compliance > Federal Regulation > SEC

Enforcement: SEC Bars, Fines Principals for Not Supervising CCO

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Among recent enforcement actions by the SEC was the reversal of a decision that would have allowed Steven Rattner to return to the securities industry.

In addition, the agency barred and fined the two principals of a registered investment advisor after they failed to supervise the firm’s chief compliance officer, who was indicted for misappropriating client assets, and the Financial Industry Regulatory Authority censured and fined J.P. Morgan Securities more than $1 million for failed manual processes.

SEC Bars, Fines RIA Principals for Failing to Supervise CCO

James Budden and Alexander Budden, principals of RIA Professional Investment Management Inc., were barred by the SEC and fined after the agency found that they failed to supervise the firm’s chief compliance officer, who was indicted for misappropriating client funds.

According to the agency, both Buddens failed to reasonably supervise Douglas Cowgill in his capacity as CCO of PIM as he misappropriated more than $840,000 in client assets. PIM provides third-party administration services and investment advisory services to approximately 15 retirement plan clients.

In 2014, the SEC charged PIM and Cowgill with antifraud violations after they hid “a shortfall of more than $700,000 in client assets by sending false account statements to clients.” Cowgill was subsequently barred and criminally charged by a grand jury with “thirteen counts of wire fraud, five counts of engaging in monetary transactions in property derived from specified unlawful activity, two counts of theft or embezzlement from an employee benefit plan and one count of perjury.”

The Buddens never took any action to ensure that Cowgill was carrying out the responsibilities of a CCO, instead assuming that because he was CCO he was engaging in such activities as custody exams and compliance reviews when in fact he did none of those things. When they learned Cowgill had failed to cooperate with auditors or engage accountants for surprise exams, they did not follow through with any actions to bring about compliance. They also did nothing to address delinquent ADV-E filings for the firm.

Without admitting or denying the SEC’s charges, both agreed to the sanctions — for James Budden, a three-year ban before he can reapply, plus a fine of $125,000; for Alexander Budden, a two-year ban before he can reapply, plus a fine of $75,000.

SEC to Reverse Rattner Decision

The SEC is planning to reverse a March decision that would have allowed former Quadrangle Group chairman Steven Rattner to return to the securities industry as an investment banker at Guggenheim Securities LLC.

While the original decision would have imposed conditions on Rattner’s return — he was barred from the industry for five years in the wake of a pay-to-play scandal involving a New York state pension fund — two SEC commissioners were reportedly unhappy with the decision, which had been approved by lesser officials, and the decision was made to revisit the issue. Andrew Cuomo, New York’s attorney general, had originally sought a lifetime ban against Rattner’s return because of the kickback scheme, which brought Quadrangle $150 million in investments during 2005 and 2006.

For his part, Rattner opted to rescind his request for reinstatement after learning that the agency planned to re-examine the decision.

FINRA Fines J.P. Morgan Securities $1 Million on Manual Process Violations

J.P. Morgan Securities LLC and J.P. Morgan Clearing Corp. were censured, charged with manual process violations and fined a total of $1.025 million after FINRA said they failed to send investment objective change letters to customers, review outside brokerage accounts, send account opening letters and send transaction confirmations. It also failed to send required privacy notices in a number of instances.

According to the agency, although the firms had policies and procedures in place to make sure these required actions were taken, those policies and procedures were not enforced in the case of some documents that had to be sent manually.

The firms have neither admitted nor denied FINRA’s findings but have consented to the sanctions.

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