The SEC has increased rhetoric regarding being a tougher cop on the beat going forward. While time will tell whether we see a change in enforcement actions, it has long been accepted that a sure way to be referred to enforcement is by ignoring deficiencies found during past examinations. The SEC announced that it took action in two cases against firms under its compliance program initiative, which targets firms that have been warned by SEC examiners about deficiencies.
Despite prior warnings from examiners, Modern Portfolio Management and its owners failed to complete annual compliance reviews in 2006 and 2009 and made misleading statements on the firm’s website and investor brochure. The parties agreed to be censured and pay $175,000 in penalties. The owners must complete 30 hours of compliance training. In addition, the firm must appoint a new chief compliance officer and retain a compliance consultant for three years.
Equitas Capital Advisers, Equitas Partners and their owners and chief compliance officers failed to adopt, implement and review proper policies and procedures. The firms made false performance, compensation, and conflicts of interest disclosures. In addition, the firm inadvertently yet repeatedly billed clients inaccurately (both over and under billing). SEC examiners warned the firms of these deficiencies during 2005, 2008 and 2011 examinations. The parties reimbursed all overcharged clients, agreed to pay $225,000 in penalties, agreed to censures and hired independent compliance consultants. The firms must also notify clients of the enforcement actions.
Each of the parties mentioned had ample warning of their deficiencies. One of the first places that advisers should look to when reviewing the effectiveness of their compliance program is past deficiencies found by the firm or examiners. These issues become low hanging fruit for examiners during subsequent visits and can result in enforcement that is easy to avoid.