Tag Archives: compliance

SEC Sanctions $1B AUM Investment Adviser for Weak Compliance Culture

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On June 23, 2015, the SEC censured an investment advisor and its two principals for rickety compliance policies and procedures.[1] Among other things, the SEC found that, due to systemic compliance failures, the advisor overcharged its high net worth clients for their investments in a mutual fund called the Appleseed Fund. The firm, Pekin Singer, offered shares in the Appleseed Fund under a sliding fee structure where clients who met a higher minimum investment paid a lower fee. Pekin Singer failed to timely advise its clients, most of whom met the higher minimum investment threshold, that they could convert to the lower costs shares, thereby improperly increasing the firm’s bottom line at the expense of customers.

Pekin Singer’s internal compliance issues ran deep. In 2009 and 2010, it failed to conduct required annual compliance program reviews and it chronically underfunded and underemphasized its compliance function. For example, the firm’s former CCO had limited compliance experience and was required to simultaneously serve as the CFO of the firm. Because of the multiple hats the he wore, the CCO was only able to devote 10% to 20% of his time to compliance issues.

Further, the CCO, aware of his limitations in the compliance area, sought to hire outside compliance help. After two years of lobbying, the firm hired an outside compliance consultant. The consultant’s review coincided with an OCIE examination by the SEC’s Chicago office. The examination and consultant’s review uncovered a number of compliance failures, including improper trading by an employee, which could have been prevented if the firm had enforced its code of ethics.

To its credit, Pekin Singer fully cooperated with the SEC and returned the excessive fees to its clients. It also hired a new CCO whose only job is compliance and hired an outside attorney to advise on securities law issues relating to mutual funds. Finally, the firm has continued and expanded its relationship with an outside compliance consultant who is charged with monitoring and advising on the firm’s annual compliance program reviews.

Bottom line: Advisory firms and their principals should not skimp on or de-prioritize compliance issues. While having robust compliance policies and controls in place can seem costly up front, the costs to the firm, both in terms of reputation and money, can be much more if OCIE finds deficiencies.

[1] http://www.sec.gov/litigation/admin/2015/ia-4126.pdf

Employers Beware – SEC Charges Company for Stifling Whistleblower Activity

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Employers conducting internal investigations often have employees sign agreements requiring them to acknowledge the confidential nature of employee interviews. Less common are agreements that prohibit employees from discussing the interview with anyone outside the company on the pain of possible termination for such disclosure. On April 1, 2015, the SEC found such an agreement, required by a global engineering firm, to violate SEC Rule 21F-17. That Rule, adopted pursuant to Dodd-Frank, prohibits companies from taking, “any action to impede an individual from communicating directly with the [SEC] about a possible securities violation, including … threatening to enforce a confidentiality agreement.”

The firm, KBR Inc., had required witnesses in internal investigations to sign confidentiality statements with language warning that they could face discipline or be fired if they discussed the matters with persons outside KBR. Although there was no evidence that KBR had actually sought to enforce the confidentiality statement, KBR nonetheless agreed to pay a $130,000 penalty and amend its confidentiality statement to make clear that employees may report potential securities violations to the SEC and other federal agencies without fear of retribution.

Bottom line: Companies conducting internal investigations that want to have witnesses acknowledge the confidential nature of interviews should amend their agreements and statements to reflect that employees may report potential violations to the Government without fear of any adverse employment action. In fact, companies seeking to avoid this problem may want to consult the amended language adopted by KBR in the SEC Order –   http://www.sec.gov/litigation/admin/2015/34-74619.pdf.