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SEC Penalizes Investment Advisers for Compliance Failures

Saturday, December 3, 2011

In 2006 when the SEC implemented Rule 206(4)-7 of the Investment Advisers Act, the “Compliance Rule”, we all knew it was only a matter of time before the deficiencies resulting from that Rule would start to pile up. Not because advisers wish to defraud or hurt their clients, but from a general lack of understanding about what was required. Well today the SEC charged three investment advisers for failing to put in place compliance procedures designed to prevent securities law violations.

The cases are the result of a SEC initiative to proactively prevent investor harm by working closely with agency examiners to ensure that viable compliance programs are in place at firms. When SEC examiners identify deficiencies in a firm’s compliance program, those deficiencies need to be corrected before they lead to other securities law violations that could harm investors. Investment advisers that essentially ignore SEC examination warnings risk being the subject of SEC enforcement actions.

The firms being charged with compliance failures in separate cases today are Utah-based OMNI Investment Advisors Inc., Minneapolis-based Feltl & Company Inc., and Troy, Mich.-based Asset Advisors LLC. The SEC also charged OMNI’s owner Gary R. Beynon, who served as the firm’s chief compliance officer despite living in Brazil and performing virtually no compliance responsibilities. Feltl & Company, Asset Advisors, and Beynon will pay financial penalties and institute a series of corrective measures to settle the SEC’s charges.

In two of the cases, OMNI and Asset Advisors, SEC examiners previously warned the firms about their compliance deficiencies.

“Not all compliance failures result in fraud, but many frauds take root in compliance deficiencies,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “That simple truth underlies our renewed focus on identifying and charging firms and individuals that fail their legal obligations to maintain adequate compliance programs.”

Carlo di Florio, Director of the SEC’s Office of Compliance Inspections and Examinations, added, “When SEC examiners identify compliance deficiencies, firms are expected to remediate them. The Commission will take enforcement action against registrants that fail to do so.”

Advisers would be prudent to take a look at their compliance programs and see if they are up to the SEC test. If not, be proactive, time and money spent now can minimize your exposure to regulatory deficiencies and possibly fines. If your program is sound, try running a mock audit and see if you can produce everything the SEC would request in a timely manner. Compliance should be an everyday mindset, not a fire drill.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes. 

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