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SEC Penalizes Investment Advisers for Compliance Failures—Lessons For Soon to be Registered Advisers to Private Equity and Hedge Funds

By | November 28, 2011

The SEC announced three settled enforcement actions against registered investment advisers for compliance failures.  The alleged instances of noncompliance demonstrate the types of things the SEC will be looking for when it begins examinations of advisers to private equity groups and hedge funds which will be required to register under the Dodd-Frank Act.

Some of the deficiencies cited by the SEC which are relevant to advisers to private equity groups and hedge funds are:

  • Failure to institute a compliance program and unsupervised advisory representatives.
  • Failure to establish, maintain, and enforce a written code of ethics, including failure to review access persons’ financial reports, failure to assess whether access persons are following required internal procedures, and failure to evaluate transactions to identify any prohibited practices.
  • Failure to maintain and preserve certain books and records.
  • Failure to review at least annually written compliance policies and procedures and the effectiveness of their implementation.
  • Using an off-the-shelf compliance manual that included language from both broker-dealer and investment adviser regulations, and not specifically tailored to the adviser’s business.
  • Appointing a Chief Compliance Officer with no prior experience in compliance and, other than talking to a consultant, doing nothing to prepare himself for the CCO role. Furthermore, the individual did not attend any training or continuing education on compliance after he assumed the CCO position.

One of the enforcement actions also demonstrate that the SEC will seek penalties personally from a Chief Compliance Officer.  That individual assumed the responsibilities of the CCO while living abroad.  However, the individual failed to perform any supervisory or compliance activities, other than requiring  that the two advisory representatives associated with the firm acknowledge receipt of the latest version of the compliance manual.  The individual agreed to pay a civil monetary penalty of $50,000.

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Contact Steve Quinlivan for more information.