The SEC brought an enforcement action against Thomas Meade, President and CCO of Private Capital Management, Inc., formerly a registered investment adviser based in Denver, Colorado. The SEC alleges that Meade failed to prevent, detect or respond to insider trading by a former PCM, Inc. Vice President, Drew Peterson in 2010.
The SEC found that Meade was aware of the unique risks for misuse of material non-public information by Peterson due to Meade’s personal relationship with Peterson’s father, who served on the board of at least one public company. Yet, in the SEC’s view, Meade failed to design PCM, Inc.’s written compliance policies and procedures (Policies and Procedures) in light of these insider trading risks associated with PCM, Inc.’s particular operations. Additionally, Meade failed to adequately collect and review records of personal trading by PCM, Inc. employees during the relevant period. According to the SEC, Meade failed to maintain restricted or watch lists of stocks as required under PCM, Inc.’s Policies and Procedures. Even after learning of Peterson’s insider trading, the SEC stated that Meade failed to conduct any investigation of the trading as required by PCM, Inc.’s Policies and Procedures or document violations of PCM, Inc.’s Code of Ethics.
Lastly, as CCO, Meade was responsible for administering PCM, Inc.’s Policies and Procedures. The SEC found that he overly relied on employees to self-report violations and failed to annually assess the adequacy or effectiveness.
The SEC stated that Meade did not assess the adequacy or effectiveness of PCM, Inc.’s Policies and Procedures as required annually by Rule 206(4)-7 under the Advisers Act. Meade confirmed to the SEC that PCM, Inc.’s Policies had been updated only two times since PCM, Inc.’s counsel initially drafted the policies. Furthermore, PCM, Inc.’s Policies and Procedures included outdated references to rules and regulatory frameworks that had been altered or eliminated several years earlier. While Meade did complete annual certifications attesting to a review of the policies, the SEC stated that he did not take any steps to assess how such policies actually operated in the context of PCM, Inc.’s business.
According to the SEC, PCM, Inc.’s Policies and Procedures failed to adequately address the risks associated with personal trading activities of supervised persons, particularly the unique risks for insider trading that it faced given the close relationship of Meade and Peterson with Peterson’s father, who served on the board of at least one public company. Meade was aware of the unique conflicts and risks to PCM, Inc. posed by these relationships yet took no action to address them through PCM, Inc.’s Policies and Procedures.
As a result of the conduct described above, the SEC found that PCM, Inc. willfully violated, and Meade willfully aided and abetted and caused PCM, Inc.’s violations of:
- Section 204A of the Advisers Act and Rule 204A-1 thereunder, which requires that a registered investment adviser establish, maintain and enforce a written code of ethics;
- Section 204(a) of the Advisers Act and Rules 204-2(a)(12-13) thereunder, which require that SEC-registered advisers maintain and preserve certain books and records; and
- Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, which requires that a registered investment adviser: (1) adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules; (2) review at least annually its written policies and procedures and the effectiveness of their implementation; and (3) designate a Chief Compliance Officer responsible for administering the policies and procedures.
In addition, the SEC found that Meade failed to reasonably supervise Peterson within the meaning of Section 203(e)(6) of the Advisers Act, with a view to preventing violations of the Advisers Act and rules thereunder. The SEC noted that a safe harbor exists if there are “established procedures, and a system for applying such procedures” that would be expected to “prevent and detect the violation” and such person has reasonably discharged the duties and obligations upon him without “reasonable cause” to believe such procedures were not being complied with. Given the pervasiveness of PCM, Inc.’s failure to comply with Advisers Act rules and its own policies, the SEC stated that Meade could not have had “reasonable cause” to believe that PCM, Inc. was in a position to prevent and detect Peterson’s violations.”
Click here to access the administrative action.