Investment Advisor Penalized for Insufficient Written Supervisory Policies and Procedures
Capital Dynamics Inc. is a New York-based investment advisory firm that agreed to pay a penalty of $275,000 when the SEC found that the firm improperly allocated investment funds. The Commission also found that the firm failed to adopt and implement written supervisory policies and procedures reasonably designed to prevent violation of the Investment Advisors Act of 1940 and its related rules.
CDI introduced an investment program that focused on clean energy and infrastructure, called the “Solar Fund.” It organized the program with an Umbrella Agreement with certain employees that agreed to manage the fund. For this program, investors committed to contributing $282 million for energy assets and businesses primarily located in the United States.
The organizational documents of the Solar Fund provided that CDI and the Solar Fund general partners would pay for their own normal operating expenses, which included “all routine, recurring expenses incident to” their own operations. Under this provision, CDI agreed that it would pay its own employee expenses, as well as expenses from the employment of consultants. Another provision provided that CDI would pay for expenses that it incurred for the establishment and sale of the fund, in addition to, direct and indirect expenses “incurred in relation to the administration and operations” of the fund. The Commission found that between March 2011 and July 2015, CDI improperly allocated a total of $1,273,148 to pay employee expenses and consultant costs.
In addition to the organizational documents, the program was also governed by rules written in the “Solar Fund Bible.” It provided insufficient procedural guidance about the approval of expenses and provided almost no reviews of approved invoices.
In an effort to improve the firm’s compliance program, it hired more compliance staff and designated a new chief compliance officer. The new CCO evaluated CDI’s expense approval and review procedures.
The firm also replaced the Solar Fund Bible with comprehensive policies and procedures that included multiple levels of review for expense allocations, escalation procedures to the compliance department, and increased oversight of expenses charged by its investment adviser representatives.
As a result, CDI voluntarily reimbursed the Solar Fund a total of $1,405,537 for the improperly allocated expenses, plus interest. To read the full order, please click here.
Red Oak Compliance Solutions offers comprehensive compliance services to ensure that investment advisers create an adherable compliance policy program that includes comprehensive written supervisory policies and procedures. If you have any questions or concerns about preparing for an audit or need any assistance with your compliance program, please contact us at 888.302.4594 or email us and we will be happy to assist.