In a case that underscores the importance of maintaining thorough and contemporaneous records of compliance reviews of trading records of firm personnel for both broker-dealers and registered investment advisers, on October 15th, 2014, the Securities and Exchange Commission’s Enforcement Division instituted an administrative proceeding against a former compliance officer at Wells Fargo Advisors for allegedly altering documents requested by the SEC during an insider trading investigation.
The Wells Fargo Advisors’ compliance officer was responsible for identifying suspicious trades by Wells Fargo personnel and determining, after a thorough analysis, or what was called a “look back review,” whether such trading was based on material non-public information. On September 2nd, 2010, the compliance officer began review on a set of trades in Burger King securities made by a registered representative of Wells Fargo Advisors, prior to an announcement that the private equity firm, 3G Capital Partners Ltd. (“3G Capital”), was to acquire Burger King at take it private. The findings contained within the compliance officer’s review confirmed that the registered representative and his customers bought Burger King securities ten days prior to the announcement. However, the compliance officer failed to make any additional inquiries into the trades and closed the review with “no findings.” The registered representative was later criminally charged in September of 2012, and subsequently was convicted of trading in Burger King securities on the basis of material non-public information.
In its enforcement action, the SEC alleged that in December of 2012, the compliance officer altered her findings to make it look like her look back review of the registered representative’s trades was more thorough that it originally was. Once the document was turned over to the SEC for production, enforcement staff questioned the compliance officer about a discrepancy in dates contained in the look back review. The questioning centered around the date “9/1/12” appearing within the September 2010 document. The compliance officer initially denied altering the document after September 2010, the SEC stated, but in testimony given to Commission staff a second time, she testified to doing so. Wells Fargo eventually terminated her employment.
The charges brought against the compliance officer include willfully aiding and abetting and causing Wells Fargo to violate Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-4(j), along with Rule 204(a) under the Investment Advisors Act of 1940.
This enforcement proceeding underscores the need for all registered investment advisers to conduct thorough reviews of personal trading of its investment adviser representatives, as required by the Code of Ethics Rule, Rule 204A-1 under the Investment Advisers Act, and to create an accurate documentary record of such reviews. Among other things discussed in the Commission’s Order Instituting Proceedings was that the firm’s compliance procedures required the reviewing compliance officer to print out and maintain records relevant to her review of any potential insider trading activity, something that was not done in this particular case. Although the review by the compliance officer referred to news and historical pricing data regarding the stock at issue, there was no printed record that the compliance officer actually reviewed any such material. Clearly, the fact that no such data was printed contemporaneously and placed in the file contributed to the enforcement staff’s conclusion that the review notes were added at a later date.
As the regulation of investment advisors continues to increase alongside the recent growth of investment advisory businesses, Parker MacIntyre can assist financial service providers with the complex issues that arise in the course of business, including compliance with federal and state laws and rules. Parker MacIntyre’s attorneys regularly advise in the area of broker-dealer, investment adviser, and securities law compliance.