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Jay Gould, partner, Pillsbury Winthrop Shaw Pittman

SEC gets serious about adviser compliance


Jay Gould, partner with law firm Pillsbury Winthrop Shaw Pittman, says the SEC’s recent decision to charge three investment advisers over compliance failures sends a ‘clear signal’ that the regulator is ‘serious about adviser compliance’…

On November 28, 2011, the SEC charged OMNI Investment Advisors, Inc of Utah, Feltl & Company Inc. of Minneapolis and Asset Advisors LLC of Troy, Michigan for failing to adopt and implement compliance procedures designed to prevent securities law violations.

The three enforcement actions discussed below should send a clear signal to investment advisers that are already registered and have implemented written compliance policies and procedures, as well as those advisers that will need to register by 15 February, 2012, that the SEC is serious about adviser compliance and is willing to make examples of those advisers that do not fully implement a tailored compliance program. 

All three investment advisers were found to be in violation of the “Compliance Rule” under Rule 206(4)-7 of the Investment Advisers Act and were separately ordered to pay penalty fees and institute a series of corrective measures to settle the SEC charges.  If you are unfamiliar with the requirements of the Compliance Rule, you should be aware that it requires every investment adviser to appoint a Chief Compliance Officer that has the requisite experience and background to successfully do the job, and it requires the CCO to prepare an "annual risk assessment" that is presented annually to senior management.  It is not uncommon now for sophisticated investors to request copies of the annual risk assessment or, at a minimum, to request an explanation of any material deficiencies in the annual risk assessment. 

OMNI and Beynon failed to adopt and implement written compliance policies and procedures, failed to establish, maintain and enforce a written code of ethics and failed to maintain and preserve certain books and records.  Under the settlement, Beynon agreed to pay a USD50,000 penalty.  He also agreed to be permanently barred from acting within the securities industry in any compliance or supervisory capacity and from associating with any investment company.  In addition, as part of the settlement, OMNI agreed to provide a copy of the proceeding to all of its former clients between September 2008 and August 2011. 

Feltl & Company failed to adopt and implement written compliance policies and procedures for its growing advisory business. It further neglected to adopt a code of ethics and collect the required securities disclosure reports from its staff.  Under the settlement, Feltl & Company agreed to pay a penalty of USD50,000 and return more than USD142,000 to certain advisory clients.  In addition, the firm will hire an independent consultant to review its compliance operations annually for two years, provide a copy of the SEC’s order to past, present and future clients, and prominently post a summary of the order on its website.

Asset Advisors failed to adopt and implement a compliance program.  Asset Advisors adopted policies and procedures after SEC examiners brought it to the firm’s attention, but never fully implemented them. Similarly, Asset Advisors only adopted a code of ethics at the behest of the SEC exam staff and then failed to adequately abide by the code. Under the settlement, Asset Advisors agreed to pay a USD20,000 penalty, cease operations, de-register with the Commission, and with clients’ consent, move advisory accounts to a new firm with an established compliance program.

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