United States: SEC Compliance Initiative: Lessons From The Latest Cases

On Oct. 23, 2013, the SEC announced settled enforcement proceedings with three investment advisory firms. The cases were announced in a single press release, designed to impress on advisers that the SEC is pursuing compliance issues when advisers are not taking compliance issues seriously.

Executive Summary

These cases all involve situations in which registered investment advisers either ignored, or did not respond adequately to, comments from SEC staff in regulatory compliance exams. The cases involved sanctions for three advisory firms and several individuals involved with these firms. These cases involve civil monetary penalties that total $400,000.

The lessons from these cases include to:

  • follow up on deficiencies cited in SEC regulatory compliance exams;
  • make sure compliance personnel are adequately trained;
  • tailor your compliance procedures to the operations of your company;
  • complete and document annual reviews of compliance procedures;
  • make sure accounting inputs have adequate cross-checks to avoid billing and other errors; and
  • make sure disclosures to advisory clients and potential advisory clients about SEC compliance exams are accurate.

These cases arise out of the compliance initiative in the SEC Enforcement Division's Asset Management Unit, which seeks to proactively prevent investor harm by working closely with SEC examiners to ensure that advisers have viable compliance programs in place.

An earlier SEC press release stated the following concerning this compliance initiative:

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.

These cases demonstrate these concepts in action, and provide a clear indication that advisers need to have a continued focus on compliance matters.

Equitas Capital Advisors, LLC (Equitas) and Equitas Partners LLC (Equitas Partners)

Two of these cases arise out of the same adviser, Equitas, whose core business is recommending money managers to clients, as opposed to investing client assets directly. Equitas is based in New Orleans, Louisiana.

Equitas Partners was a registered investment adviser from 2005 to March 2012 when it withdrew. Equitas Partners is now an exempt reporting adviser at the federal level and manages a fund of hedge funds known as the Evergreen Fund.

David Thomas is the principal founder and sole owner of Equitas.

Susan Christina has worked at Equitas since it was founded and has been its CCO since approximately 2004.

SEC Office of Compliance Inspections and Examinations' (OCIE) Examinations of Equitas and Equitas Partners in 2005, 2008 and 2011

The order alleges a number of violations, including Equitas's:

  • inadvertent overbilling and underbilling of certain clients;
  • negligently making false and misleading disclosures to clients and potential clients about its historical performance, compensation, conflicts of interest and prior examination deficiencies;
  • failing to conduct the required annual compliance reviews; and
  • failing to maintain written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules.

The order alleges that Equitas Partners, as well as Equitas, had the violations in the last two bullets.

Remedial Action

The settlement includes remedial action.

  • Equitas and Equitas Partners agreed to continue to retain an independent compliance consultant to conduct three annual compliance reviews.
  • The reports of the consultant are to be provided to the SEC, as well as Equitas and Equitas Partners.
  • Equitas and Equitas Partners are required to implement the recommendations of the consultant (except to the extent that Equitas and Equitas Partners can convince the consultant that the recommendations are burdensome).
  • Advisory clients are to receive notice of the settlement.
  • A summary of the settlement is required to be placed on the website of Equitas with a link to the order itself.

Monetary Penalties

Equitas and Equitas Partners were censured. There were civil monetary penalties for Equitas of $100,000 and Thomas of $35,000.

Stephen Derby Gisclair (Gisclair)

Gisclair was a cofounder, coowner and the COO of Equitas. Gisclair was the CCO of Equitas Partners.

Gisclair was the primary liaison between OCIE staff and Equitas and the primary author of responses by Equitas to SEC staff deficiency letters. As result, Gisclair has a separate order and settlement relating mainly to deficiencies at Equitas and Equitas Partners.

Gisclair left Equitas in 2010 and became associated with Crescent Capital Consulting, LCC (Crescent). This move resulted in litigation between Equitas and Gisclair.

The Gisclair order involves alleged violations that are the same items as those described above for Equitas and Equitas Partners. In addition, the SEC order states that Gisclair used customer information in violation of the provisions of Regulation S P when he left Equitas and Equitas Partners to join Crescent.

After Gisclair left Equitas in 2010 and became associated with Crescent, OCIE found some of the same deficiencies during its first examination of Crescent in 2012-2013.

The SEC's order notes that:

  • Gisclair gave up his role as CCO of Crescent at the start of 2013.
  • Crescent hired an independent consultant in 2012 to evaluate and improve compliance procedures, including matters related to deficiencies found by OCIE during its 2012-2013 examination.
  • Crescent reimbursed its overcharged advisory clients.
  • Crescent implemented a new, more automated billing system expected to reduce billing errors.

Gisclair also agreed to provide notice of the settlement to Crescent's advisory clients.

Gisclair Monetary Penalty

Gisclair was subject to a civil monetary penalty of $90,000, the highest individual civil monetary penalty in these cases.

Modern Portfolio Management, Inc. (MPM)

This case involves the alleged failure of MPM, a registered investment adviser based in Ohio, and its principals, G. Thomas Damasco and Bryan F. Ohm, to correct ongoing violations at the advisory firm. MPM's ADV indicates that it provides customized nondiscretionary portfolio management services.

Damasco and Ohm are the founders and principal shareholders of MPM. Damasco is the CEO and was designated as the CCO in November 2012. Ohm is the president.

The SEC emphasizes that in the view of the SEC, the MPM employee who handled compliance functions during almost all of the period of time involved here did not have adequate knowledge, training or resources to carry out compliance duties.

As is outlined below, the violations alleged by the SEC took place over a relatively long period of time and were not fixed, despite being noted in two consecutive compliance exams.

2008 OCIE Examination

An on-site examination of MPM in 2008 by OCIE found that MPM had violated securities laws by:

  • failing to complete an annual compliance review in 2006;
  • making misleading statements on MPM's website regarding MPM's exclusive access to Dimensional Fund Advisors (DFA) funds;
  • omitting disclosures in its performance information that were required by MPM's own policies and procedures; and
  • making misleading statements in its performance information by providing model results that did not deduct MPM's advisory fees.

After the examination, OCIE staff sent MPM a letter concerning these violations and, according to the order, MPM stated that it would take corrective action to remedy these violations.

2011 OCIE Examination

The SEC order states that MPM continued to violate securities laws at the time of OCIE's 2011 examination by failing to complete an annual compliance review in 2009 and by continuing to make misleading statements in its marketing materials regarding its access to DFA funds. MPM also misleadingly represented in one location on its website that it had over $600 million in assets when it reported in its Form ADV that it had less than $325 million in assets under management as of September 2011.

During the SEC's investigation, MPM hired a compliance consultant to help MPM with compliance issues.

Remedial Action

The settlement with the SEC included significant remedial actions.

  • Damasco and Ohm agreed to complete 30 hours of compliance training relating to the Advisors Act.
  • MPM agreed to hire a new CCO.
  • MPM agreed to retain a compliance consultant for at least three years.

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.

Authors
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
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must 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.

Disclaimer

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.

General

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