Compliance and Regulatory Services (“CARS”) Hot Topics for July 2015

July 09, 2015

For this distribution, we are highlighting an item that has been at the forefront of chief compliance officers’ (“CCO”) job related concerns, based on our clients’ feedback and questions being fielded by our staff: liability for serving as the CCO of an SEC-registered entity. The CCO’s nerve factor has risen recently due, in part, to the number of CCOs being cited and fined for compliance failures to the point that even Commissioner Daniel Gallagher felt compelled to express his concern in a press release dated June 18, 2015 (see link below). Gallagher cites two cases that he believes the CCO should not have been charged: Blackrock Advisors, LLC. (April 20, 2015) (“Blackrock”) and SFX Financial Advisory Management Enterprises, Inc. (June15, 2015) (“SFX”).

In the Blackrock case, Daniel Rice, an energy portfolio manager held a position in a family energy company (“Rice Energy”), which later formed a joint venture with a coal company that over time became the largest holding in a Blackrock Energy & Resources Portfolio to which Rice served as the manager. Blackrock compliance approved Daniel Rice’s investment and knew of the conflict of interest. Furthermore, Blackrock’s compliance program did not address outside business interests, which is one of the most fundamental policies and procedures a registered investment adviser must implement. The CCO failed to disclose the conflict of interest to the registered investment funds’ boards of directors. Blackrock and the CCO consented to the entry of an order finding that both violated, among other things, SEC Rules 206(4)-7 and 38a-1, the compliance program rules under the Investment Advisers and Investment Company Acts of 1940, respectively.

As for the SFX case, the president of the registered adviser was charged with violating his discretionary and fiduciary duty to his clients by stealing $670,000 over a 5-year period by writing checks to himself and personally initiating wires from client accounts for his own benefit. SFX’s compliance procedures called for the ongoing monitoring of client accounts by reviewing cash flows. The CCO did not oversee this activity and did not review client accounts, as required under the compliance program; therefore failing to exercise appropriate supervisory oversight of the president’s activities. The CCO was also responsible for misrepresenting in Form ADV, the firm’s SEC registration statement, that client accounts were reviewed several times a week. SFX and the CCO agreed to pay a $150,000 and $25,000 penalty, respectively.

Our Take:
The SEC’s actions against the two CCOs in both these cases could have been very easily avoided. After reading the facts, does it really appear as though the SEC is picking on these two CCOs? We think not. We keep coming full circle back to the same resolution regardless what the SEC infraction or rule violation cited. “We cannot stress enough the importance of maintaining rigorous compliance policies and procedures to address actual and potential conflicts of interest.” -The compliance program SEC rules cited are designed to be dynamic by requiring registrants to be constantly assessing operations, monitoring high risk activities and testing controls. This affords the CCO the opportunity to identify and address new and previously undetected conflicts of interest, which again is in keeping with the spirit of SEC compliance program rules.

SEC News 

June 30, 2015 SEC Charges Goldman Sachs With Violating Market Access Rule
June 29, 2015 SEC Announces Cherry-Picking Charges Against Investment Manager
June 29, 2015 SEC Charges KKR With Misallocating Broken Deal Expenses
June 25, 2015 John Roeser Named Associate Director of the Office of Market Supervision
June 23, 2015 SEC Charges Microcap Promoter With Illegally Selling Penny Stock Shares
June 23, 2015 SEC Obtains Asset Freeze Against China-Based Trader for Suspicious Activity Last Week
June 23, 2015 SEC Charges Unregistered Brokers in EB-5 Immigrant Investor Program
June 18, 2015 SEC Charges Microcap Oil Company, CEO, and Stock Promoter With Defrauding Investors
June 18, 2015 SEC Charges 36 Firms for Fraudulent Municipal Bond Offerings
June 17, 2015 SEC Charges Investment Adviser and Mutual Fund Board Members With Failures in Advisory Contract Approval Process
June 17, 2015 SEC Announces Enforcement Action for Illegal Offering of Security-Based Swaps
June 17, 2015 SEC Charges Investment Adviser With Fraudulently Funneling Client Assets to Companies in Owner’s Interest
June 16, 2015 SEC Announces Charges Against Retirement Plan Custodian in Connection With Ponzi Scheme
June 15, 2015 Investment Advisory Firm’s Former President Charged With Stealing Client Funds
June 15, 2015 Swiss Trader to Pay $2.8 Million to Settle Insider Trading Charges
June 12, 2015 SEC Publishes Request for Public Comment on Exchange-Traded Products
June 10, 2015 SEC Charges Phony Hedge Fund Manager With Theft of Money Invested by Small Businesses
June 9, 2015 SEC Charges Biotech Employee, Two Stockbrokers With Insider Trading on Nonpublic Information About Pharmaceutical Trials and Merger
June 9, 2015 Trader to Pay $1 Million for Short Selling Violations
June 9, 2015 Agencies Issue Final Standards for Assessing Diversity Policies and Practices of Regulated Entities
June 8, 2015 SEC Names Richard R. Best as Regional Director of Salt Lake Office
June 5, 2015 Daniel Gregus Named Associate Director for Broker-Dealer Exam Program in Chicago
June 5, 2015 SEC Charges CSC and Former Executives With Accounting Fraud
June 4, 2015 SEC Freezes Profits From Scheme to Manipulate Avon Stock
June 4, 2015 SEC Staff Provides Additional Analysis Related to Proposed Pay Ratio Disclosure Rules
June 3, 2015 SEC Warns of Purported Financial Professionals Using False Credentials to Attract Investors
June 3, 2015 SEC Charges Four With Insider Trading Ahead of Secondary Offerings
June 1, 2015 SEC Charges Investment Adviser With Defrauding Retired Teachers
June 1, 2015 Merrill Lynch Admits Using Inaccurate Data for Short Sale Orders, Agrees to $11 Million Settlement



June 29, 2015 The Role of Chief Compliance Officers Must be Supported
June 25, 2015 Building Meaningful Communication and Engagement with Shareholders
June 25, 2015 A Threefold Cord1 — Working Together to Meet the Pervasive Challenge of Cyber-Crime
June 23, 2015 Activism, Short-Termism, and the SEC: Remarks at the 21st Annual Stanford Directors’ College
June 18, 2015 Statement on Recent SEC Settlements Charging Chief Compliance Officers With Violations of Investment Advisers Act Rule 206(4)-7
June 18, 2015 Anti-Money Laundering: An Often-Overlooked Cornerstone of Effective Compliance
June 15, 2015 Mutual Funds - The Next 75 Years
June 10, 2015 Quality Data and the Power of Prevention: Remarks at Meet the Market, North America
June 5, 2015 Remarks at the 34th Annual SEC and Financial Reporting Institute Conference
June 4, 2015 Remarks Before the SEC Historical Society
June 2, 2015 Capital Unbound: Remarks at the Cato Summit on Financial Regulation



June 26 , 2015  FINRA Supports NAC Members, Chris Brummer During Online Harassment
June 22, 2015 FINRA Fines Morgan Stanley Smith Barney and Scottrade a Total of $950,000 for Failing to Supervise the Transmittal of Customer Funds to Third-Party Accounts
June 17, 2015 FINRA Issues New Investor Alert, Plan for Transition: What You Should Know About the Transfer of Brokerage Account Assets on Death
June 10, 2015 FINRA Foundation and D2D Fund Launch Interactive Strategy Game to Fight Investment Fraud
June 1, 2015 FINRA Launches National Ad Campaign Promoting BrokerCheck
June 1, 2015 FINRA Brings Transparency to Asset-Backed Securities Market


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