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News December 5, 2011 Issue

Adviser Compliance Failures Highlighted by SEC

Rule Number One in compliance (actually, Rule 206(4)-7) Ė if youíre a registered adviser or youíre required to be registered, youíve got to have a written compliance program, youíve got to review that program at least annually for its effectiveness in implementation, and youíve got to have a chief compliance officer responsible for overseeing it all.

Without those three things, it is illegal to provide investment advice to clients.

Rule Number Two in compliance (actually, Rule 204A-1) Ė if youíre a registered adviser or youíre required to be registered, it is illegal to provide investment advice to clients unless you establish, maintain, and enforce a written code of ethics. The code must:

  • Describe business conduct standards in line with the adviserís fiduciary duty;
  • Require compliance with the federal securities laws by all personnel;
  • Require code violations to be reported to the CCO;
  • Require reporting and review of personal trading; and
  • Ensure that the code is provided to all personnel and that they acknowledge in writing that theyíve received it.

As straightforward as these rules appear to be, however, a lot of folks seem to keep getting them wrong.

The SEC recently released three enforcement actions that sanctioned advisers for violating one or both of these rules. "Not all compliance failures result in fraud, but many frauds take root in compliance deficiencies," said SEC Division of Enforcement director Robert Khuzami in a press release announcing the issuance of the orders.

In two of the three cases, the SEC had previously warned the advisory firms about their compliance deficiencies. "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," said OCIE director Carlo di Florio.

The SEC orders, each dated November 28, were issued to Omni Investment Advisers (Omni) and Gary Beynon, Asset Advisors, and Feltl & Company (Feltl). .

In the Omni action, Beynon was Omniís CEO, and according to the SEC, ran the firm for three years with no compliance program in place at all. The lack of supervision, said the SECís order, was complete, as Beynon had been absent from the firm for that period of time on a three-year religious mission in Brazil.

The SEC originally examined Omni in 2007, and returned in 2010 to re-exmine the firm. At the time of the re-examination, Omni created its compliance manual, dated one day after the SECís document request. Beynon also assumed the role of CCO at that time, which had been vacant for two years. Beynon was still abroad at the time he took over CCO responsibilities, said the order.

Beynon was ordered to pay a $50,000 penalty, to provide the order to all current and former clients, and was barred from serving in a supervisory capacity with any adviser or broker-dealer.

Asset Advisors was also examined by the SEC and found to have failed to adopt and implement a compliance program. Asset Advisors adopted a program after an initial SEC examination, but then failed to implement the program, said the SECís order.

Asset Advisors paid a $20,000 penalty and was ordered to de-register with the SEC and to transfer all of accounts (with appropriate client consent) to a firm with an established compliance program.

In the Feltl action, the SEC alleged that Feltlís compliance program failed to address the adviserís growing business, and never adopted or implemented a code of ethics. As a result of the compliance failures, the SEC said Feltl engaged in "hundreds" of securities law violations. Feltl was ordered to pay a penalty of $50,000, return more than $142,000 to clients, and to retain an independent compliance consultant to review its operations for two years.