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SEC Enforcement of Investment Adviser Compliance Policies

12.08.11

A federally registered investment adviser must formulate, adopt and maintain, and implement, certain policies specified by SEC rules. That obligation applies regardless of the adviser’s size or scope of activities. Although certain of the policies may seem cumbersome or irrelevant, particularly to an adviser with only a few employees, the SEC will insist on them. The SEC will enforce an adviser’s obligation regarding those policies even in the absence of any material client complaints or any connection with allegedly fraudulent activities.

That is illustrated by the SEC’s recently announced enforcement actions against three federally registered advisers. The SEC’s actions against two of the advisers were apparently based on those advisers’ failure to adopt and implement any written compliance policies and procedures (and, in one case, even after SEC examiners had warned the adviser of the deficiency). The failure to adopt any policies, I suspect, is relatively unusual. The SEC’s action against the third adviser, Asset Advisors, LLC, presents a somewhat more instructive situation.

Asset Advisors was an approximately 12-year-old advisory business, owned and managed by an individual, with six employees. According to the SEC Order:

  • Asset Advisors was slow to adopt written compliance policies when required by SEC rules;
  • The compliance policies adopted by Asset Advisors were not completely adapted or tailored to its business or circumstances;
  • The owner-manager “reluctantly” served as the chief compliance officer of Asset Advisors “by default,” without previous experience and without having, or seeking, any education or training for that position;
  • Asset Advisors did not really implement its adopted policies – e.g., it did not periodically collect any securities-transactions or securities-holding reports from its employees, as required by its adopted code of ethics; and
  • Asset Advisors was the subject of two SEC examinations between 2007 and 2010, and did not act to address the deficiencies with its compliance policies that were identified by those examinations.

The failures to act by Asset Advisors and its owner-manager-CCO were sufficiently extreme that the SEC considered them willful. The consequences were also extreme. In the SEC Order, Asset Advisors committed to cease its business, withdraw its registration as an investment adviser, transfer each of its client accounts (with consent) to another registered investment adviser and pay a fine or penalty to the SEC.

OUR TAKE: The SEC’s action against Asset Advisors, LLC is a reminder to registered investment advisers that the SEC will enforce, even against smaller advisers, the obligation to adopt and implement the compliance policies required by SEC rules. More particularly, however, a registered investment adviser should be mindful that (1) its compliance policies should not simply be forms provided by an advisory consultant, but should be tailored to its particular business, circumstances and clients, and (2) its adopted policies should not be ignored or disregarded, but should be implemented in accordance with their terms.

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