The SEC has sanctioned Virginia-based Foxhall Capital Management (“Foxhall”) and its CEO based on an examination conducted in 2009. While Foxhall had written compliance policies and procedures in place, the SEC found that they were not reasonably designed to prevent violations of the Investment Advisers Act and its rules. Specific failures and deficiencies included, the following:
- Failure to follow the stated policies and procedures written in its compliance manual;
- Failure to maintain adequate records of its trading; and
- Failure to timely conduct the required 2007 annual compliance review.
The cited deficiencies were primarily caused by Foxhall’s trade management system, which did not properly interface with its custodian’s trading platform. Foxhall was aware of the issue in 2007, but did not replace its trade management system until 2009. As a result, for the period in question, Foxhall did not possess accurate real-time information from the custodian regarding clients’ actual account balances when making initial allocations to clients for block trades. Due to this inaccurate information, some clients who were allocated to receive certain shares did not have sufficient funds in their accounts to purchase the allocated shares. Foxhall’s unwritten practice was to reallocate those unallocated shares to other clients with sufficient cash within the same investment model at the execution price. Because Foxhall typically learned of the existence of the unallocated shares days later, this resulted in some clients paying more for the stock than they would have paid had Foxhall bought the shares on the open market at the time of the reallocation. In particular, the SEC cited over 400 instances where Foxhall reallocated unallocated shares to clients other than those originally intended to receive the shares and those clients suffered approx $20,183 in losses.
The SEC found that Foxhall did not categorize the reallocated shares as trade errors, but treated them as administrative errors. If the reallocated shares had been labeled as trade errors, Foxhall’s compliance procedures required Foxhall to document the trade error and perform a profit and loss analysis for the trade. The written policy also required Foxhall to make any client whole if any trade error resulted in a loss to the client.
As a result of the above, Foxhall agreed to pay approximately $22,000 in disgorgement and prejudgment interest and a civil penalty of $100,000. In addition, its CEO agreed to pay a civil penalty of $25,000.