Investment Adviser and CCO Failed to Respond to Red Flags Surrounding Investment Adviser Representative’s Outside Business Activities

The SEC settled charges against a registered investment adviser (Adviser) and its Chief Compliance Officer (CCO), in connection with the CCO’s and the Adviser’s failure to effectively implement the Adviser’s compliance policies and procedures, in violation of the Advisers Act. According to the SEC, the CCO failed to respond or responded inadequately to numerous red flags surrounding the outside business activities of one of the Adviser’s investment adviser representatives (IAR). Without admitting or denying SEC findings, the CCO agreed to a 5-year bar from serving in a supervisory or compliance capacity with any broker, dealer, investment adviser, municipal securities dealer, transfer agent, or nationally recognized statistical rating organization; and a $15,000 penalty. The Adviser agreed to a $150,000 penalty.

According to the SEC’s order (Order), the CCO received multiple communications from the Adviser’s regular registered broker-dealer regarding an outside business activity (OBA) being conducted by the IAR from at least February 2020 to June 2021. Despite receiving these communications, the CCO allegedly did not act appropriately to implement the Adviser’s compliance program (Program) including:

• failing to ensure the IAR submitted the formal reporting required for OBAs;
• not conducting a sufficient review to determine whether the OBA presented any conflicts of interest, and not verifying that the Adviser or the IAR had adequately disclosed to the affected clients the OBA of the IAR;
• after receiving notice from the broker-dealer that certain IAR transactions involved moving client assets to the firm involved in the OBA, failing to determine the legitimacy of those transactions;
• failing to sufficiently monitor the IAR’s compliance with the broker-dealer’s policies after receiving notice that the IAR was attempting to circumvent the broker-dealer’s compliance program; and
• despite receiving several communications concerning another OBA of the same IAR, failing to adequately and accurately report to firm management this information pursuant to the Program.

In total, the IAR diverted $1.7 million in client assets to his outside business activities. The SEC separately charged the IAR in other proceedings, which can be found here.

The SEC Order can be found here.