On October 22, 2015, the SEC announced its enforcement results for Fiscal Year 2015, including a number of first-of-their-kind cases. Chief Compliance Officers (“CCOs”) play an important role in preventing a Registered Investment Adviser (“RIA”) from becoming an enforcement statistic.

SEC’s Latest Enforcement Statistics
In the fiscal year that ended on September 30, 2015, the SEC filed 807 enforcement actions covering a wide range of misconduct. The Commission obtained orders totaling approximately $4.2 billion in disgorgement and penalties.

A number of those enforcement cases were brought against RIAs. The SEC brought a first-ever action charging a private equity adviser with misallocating so-called “broken deal” expenses. According to the SEC, the firm breached its fiduciary duty by misallocating more than $17 million in expenses to its flagship private equity funds. The SEC brought another first-ever action against an adviser that failed to report a material compliance matter to a fund board. The firm failed to disclose a conflict of interest created by a top-performing portfolio manager’s outside business activity.

The SEC’s enforcement summary also referenced other noteworthy actions against RIAs. The SEC charged an investment management firm, as well as its CEO, for defrauding investors through false performance advertising about its flagship product.

The SEC also took note of an action against a Wisconsin-based RIA and its owner for fraudulently cherry-picked winning options trades. The enforcement action relied on data from the SEC’s Division of Economic and Risk Analysis, which conducted a statistical analysis to determine whether the questionable trades might have been the result of a coincidence or luck. In addition to this action, the SEC highlighted an action against an RIA, its CEO, and three other entities based on fraud in overvaluing assets in three collateralized loan obligations.

The SEC’s announcement can be found Here.

CCOs Can Help their Firms Avoid the SEC’s Wrath
In a speech at an RIA and broker-dealer conference held on October 14, 2015, Andrew J. Donahue, Chief of Staff for the SEC, discussed the knowledge CCOs should have to diligently carry out their responsibilities:

  1. Capable CCOs should have first-hand knowledge of the various laws, regulations, and compliance requirements that apply to their firms and their business models.
  2. A CCO must develop a deep understanding of the firm, including its structure and internal operations. A CCO should understand all of the moving parts within the firm and how they interact. A CCO must possess an in-depth knowledge of the firm’s supervisory structure.
  3. A CCO must understand how the firm identifies all existing conflicts of interest and how they are resolved. CCOs must be aware of who is responsible for drafting disclosures and how they are effectively communicated to clients.
  4. CCOs must understand their clients, as well as the types of products and services being offered to them. They should also understand the profitability component of these products and services in order to conduct a robust analysis of the potential conflicts.
  5. A CCO must develop a deep understanding of the firm’s compliance and other technology platforms, since they impact the development and implementation of a robust compliance program.
  6. CCOs must have a detailed knowledge of their firms’ policies and procedures and how they are administered.
  7. CCOs must understand the various markets in which the firm operates, including any specific practices in those areas that might raise compliance concerns. A detailed understanding of the types of investment products and strategies utilized is also necessary.
  8. CCOs must fully understand the culture of the firm. Rather than promoting a culture of “can I do this?”, firms must implement a culture of “should I do this?”. Firms should also allocate sufficient resources to compliance and empower CCOs to develop a culture of compliance.
  9. CCOs must be aware of what they don’t know, so they can recognize situations where they are relying on the knowledge or expertise of others. CCOs must challenge colleagues and themselves to identify potential risks. They should foster an environment of open communication, as well as the freedom to ask tough questions. CCOs should be able to recognize where there are gaps in their knowledge or their firms’ programs.

When CCOs possess this knowledge and self-awareness, they and their firms are less likely to become an enforcement statistic.

About RIA Compliance Group: RIA Compliance Group is an investment adviser compliance consulting firm based in Boca Raton, Florida. The firm’s mission is to provide affordable, timely, practical, and cost-effective compliance advice. We help investment advisers to comply with the myriad of state and SEC regulations and compliance obligations facing their firms. RIA Compliance Group takes pride in giving personal service and real world compliance advice, not theoretical concepts and legalese. The firm interacts on a daily basis with SEC and state securities regulators.

RIA Compliance Group, LLC – 5301 North Federal Highway, Suite 380, Boca Raton, FL 33487 –
Tel: 561-600-0564 – sales@ria-compliance.com.