United States: SEC Crackdown On Investment Adviser Compliance Deficiencies


The Securities and Exchange Commission (the "SEC") is cracking down on firms with compliance deficiencies under the Investment Advisers Act of 1940, as amended (the "Advisers Act"). Although three SEC enforcement cases announced on November 28, 2011, involve extreme disregard by the particular investment adviser firms, these cases are sobering evidence of the penalties that may follow for advisers (and even for Chief Compliance Officers personally) that disregard SEC compliance.

These cases are particularly timely for advisers to hedge funds and private equity funds. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), advisers to funds of significant size will be required to be registered under the Advisers Act. All SEC-registered advisers will need to have in place appropriate compliance programs and procedures prior to March 31, 2012.

The three cases illustrate the fact that investment advisers have often been called to task by the SEC for not remedying matters identified in a prior deficiency letter. Moreover, in one case, the SEC took the adviser to task for using an "off the shelf" manual that was not properly tailored to its actual business and for not evolving its compliance program as the firm's business changed and grew. In two of the three cases (in the third, the adviser agreed to cease operations), the advisers were required to provide copies of the SEC Order to their clients.

For details of the three cases, please see the following link to the SEC release: http://www.sec.gov/news/press/2011/2011-248.htm.

Increased SEC Initiative On Compliance

In its November 28, 2011, release, the SEC stated, "These cases stem from an initiative within the SEC Enforcement Division's Asset Management Unit to proactively prevent investor harm by working closely with agency examiners to ensure that viable compliance programs are in place at firms."

This proactive approach signals an increased focus by the SEC on ensuring compliance by investment advisers with the Advisers Act and its Rules. "Not all compliance failures result in fraud, but many frauds take root in compliance deficiencies," stated 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."

Lessons To Be Learned

The SEC's recent enforcement actions indicate it is taking a proactive approach to protecting investors by demanding strict conformance with the Advisers Act's compliance requirements, and imposing personal liability where the conduct is egregious. Dodd-Frank ushered in sweeping reform and change to investment adviser regulation, which requires many previously unregistered investment advisers to become appropriately registered in the first quarter of 2012. Registration is but the first step of the process. SEC-registered investment advisers must put in place thorough, custom-tailored and ongoing compliance policies and procedures in order to satisfy their requirements under the Advisers Act. The Day Pitney attorneys listed to the right are available to discuss the intricacies of these compliance requirements and help develop an appropriate compliance program for your investment advisory business.

Some Details of the Enforcement Actions


In the Matter of OMNI Investment Advisers Inc. ("OMNI") and Gary R. Benyon (who was charged individually for personal failures in performing his responsibilities as Chief Compliance Officer), the SEC charged OMNI, among other things, with failing to establish, maintain and enforce a written code of ethics, as required under Advisers Act Rule 204A-1, and also with failing to maintain and preserve certain books and records, as required by Advisers Act Rule 204-2(a)(10). In 2007, the SEC examined OMNI and issued a deficiency letter noting several issues, including OMNI's failure to conduct an adequate annual review of its compliance program.

With respect to Mr. Benyon, the SEC found that he failed to perform virtually any compliance responsibilities after being named Chief Compliance Officer. Mr. Benyon was living in Brazil at the time. In particular, in response to an SEC subpoena, OMNI produced client advisory agreements with Mr. Benyon's signature evidencing his supervisory approval when, in fact, Mr. Benyon had never reviewed the documents and had signed the documents with incorrect dates one day before the documents were produced to the SEC.

As a result of these violations, both OMNI and Mr. Benyon were censured by the SEC. Mr. Benyon agreed to pay a $50,000 penalty, and agreed to be permanently barred from acting within the securities industry in a compliance or supervisory capacity and from associating with any investment company. OMNI also agreed to provide a copy of the SEC's Order to each of OMNI's advisory clients that existed at any time between September 2008 and August 2011.


In the Matter of Feltl & Company, Inc. ("Feltl"), the SEC charged Feltl, a dually-registered broker-dealer and investment adviser, for, among other things, engaging in hundreds of principal transactions with its advisory clients' accounts without making the proper disclosures and without obtaining consent, in violation of Section 206(3) of the Advisers Act. This failure also resulted in Feltl charging undisclosed fees to its clients participating in its wrap fee program by charging both wrap fees and commissions, which violated Section 206(2) of the Advisers Act.

The SEC stated, "Feltl's compliance breakdown was caused by its failure to invest necessary resources in the firm's advisory business as it changed and grew in relation to its brokerage business." On December 9, 2010, the exam staff issued a deficiency letter to Feltl, noting Feltl's compliance failures and its failure to disclose and obtain client consent in transacting principal trades. During this time period, Feltl maintained one compliance manual that encompassed both the brokerage and advisory businesses. This off-the-shelf manual essentially treated its brokerage and advisory accounts the same for compliance purposes.

Due to these violations, Feltl agreed, among other things, to pay a $50,000 penalty, disgorge more than $142,000 to be returned to its advisory clients, and to provide a copy of the SEC's Order to past, present and future clients.

Asset Advisors

In the Matter of Asset Advisors, LLC ("Asset Advisors"), the SEC determined that, in May 2007, Asset Advisors adopted written compliance policies and procedures only after the SEC's exam staff alerted Asset Advisors to its previous compliance failures. Thereafter, Asset Advisors failed to fully implement a compliance program, taking minimum steps to satisfy its compliance obligations only when the exam staff notified it of an impending exam.

Even after Asset Advisors adopted a code of ethics, the SEC found the firm failed to maintain and enforce the code by failing to collect written acknowledgments of the code's receipt from supervised persons and failing to periodically collect from access persons the required securities reports. In particular, the SEC noted that "Despite its promise to devote the proper time and resources to its compliance program, the firm waited until November 2009 to amend the compliance manual to incorporate comments made by the exam staff during the 2007 exam. Aside from distributing the amended manual and holding its semiannual meeting, Asset Advisors did nothing to train staff or to implement the manual's amended policies and procedures."

As a result of these deficiencies, Asset Advisors agreed to pay a $20,000 penalty, cease operations, deregister with the SEC and, with client consent, move its advisory accounts to a firm with an established compliance program.


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions