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News August 13, 2012 Issue

Adviser Sanctions Highlight Some Big "Don’ts"

Donít drop the ball when you get a deficiency letter.

Donít appoint a CCO who isnít at least familiar with the Advisers Act.

Donít buy a compliance manual off the shelf, and if you do, make sure it is the "Adviser" shelf, and not the "Broker Dealer" shelf. Do make the effort to tailor any one-size-fits-all document to your firmís specific business.

These and other problems were highlighted in the SECís recent action against Consultiva Internacional, an SEC-registered adviser based in Puerto Rico with approximately $695 million in assets under management.

The SEC examined the firm in 2005 and found a host of problems, chief among them that Consultiva had failed to implement a required compliance program pursuant to Rule 206(4)-7 with written compliance policies and procedures. The SEC cited deficiencies in the firmís compliance manual, the competency of its Chief Compliance Officer, and inaccuracies and inconsistencies with its Form ADV.

"The exam staff noted to Consultiva that its compliance manual appeared tailored to broker-dealer compliance rather than Consultivaís investment advisory business. The exam staff also questioned the CCOís ability to adequately oversee Consultivaís compliance operations due to his lack of familiarity with the Advisers Act and failure to obtain the proper training," said the SECís order.

By the time the SEC got back to Consultiva in 2010, the firm also was improperly policing its code of ethics. Among other things, the SEC alleged that the CCO was signing off on his own personal trading reports.

Although Consultiva had designated all 16 of the firmís employees as access persons, it did not document whether it had been receiving annual reports of their securities holdings.

Even though the firm had demonstrated significant and sustained lapses in its compliance program, the second time around the firm went the extra mile to get it right. In its order, the SEC noted that during the 2010 exam Consultiva hired a compliance consultant to evaluate the firmís compliance program. Consultiva then actively implemented the consultantís recommendations.

To settle the SECís concerns, the adviser undertook to retain the consultant through at least 2013, submitting to quarterly reporting by the consultant directly to the SEC, and agreeing to implement all the consultantís recommendations.

Besides footing the bill for the consultant, the firm was required to pay a $35,000 fine. The firm was also required to mail a copy of the order to its existing clients, and to post a notice on the firmís web site summarizing the order and linking directly to it for the twelve months following the entry of the order.