SEC Announces Enforcement Action for Compliance Policies and Procedures Failures

The Securities and Exchange Commission recently announced the filing of an administrative proceeding against a registered investment adviser and the investment advisers owner/CCO for failing to adopt compliance policies and procedures, a Code of Ethics, and for failing to conduct annual reviews of the same. The advisory firm is Two Point Investment Management, Inc., based in Pittsford, New York. The SEC found that the violations occurred over a 10-year period starting when the adviser first registered with the SEC in 2012.

Pursuant to the Rule 206(4)-7, registered investment advisers are required to adopt compliance policies and procedures that are reasonably designed to prevent violations of the Advisers Act. These policies and procedures should be customized to the investment adviser and reflect the adviser’s advisory operations, client base, and associated risks. In the Two Point matter, the SEC found that the adviser adopted a handbook from a professional organization in place of a traditional compliance manual. The SEC found that the adopted handbook was designed as an ethics-based guide for the professional organization’s members and examinations and made no mention of the Securities Act of 1933, the Securities Exchange Act of 1934, or the Advisors Act.

Similarly, the SEC found that the adviser failed to establish, maintain, or enforce a code of ethics pursuant to Section 204A of the Advisers Act. While the professional organization handbook addressed ethics, the SEC found that the code of ethics failed to include any specific requirement for supervised persons to comply with the various securities laws and regulations. Additionally, while the handbook called for the adviser to implement procedures to collect and monitor the personal securities transactions of the supervised persons, the SEC found that no such review was performed by the adviser in violation of the adviser’s handbook and Rule 204A-1.

With respect to both the compliance policies and procedures and the code of ethics, the SEC found that the adviser failed to conduct annual reviews to access the adequacy of the documents in light of the adviser’s practices. For these violations, the SEC named the adviser’s CCO as being responsible for the lack of annual reviews and compliance training.

To settle the administrative proceeding, the SEC accepted an Offer of Settlement from the adviser and the adviser’s owner/CCO. The settlement included a censure of the investment adviser, a $75,000 civil penalty for the investment adviser, a $25,000 civil penalty for the adviser’s owner/CCO, and a directive that the adviser cease and desist from further violations of the Advisers Act. The terms of the settlement, and the SEC’s willingness to enter into said settlement, were influenced by to the remedial efforts made by the adviser during the SEC’s investigation. The SEC noted that the Two Point had hired a new CCO and third-party compliance consultant to overhaul its compliance program. Without the remedial efforts, it is likely that the SEC would have pursued more significant penalties.

The SEC’s announcement serves as a warning to investment advisers and compliance professionals regarding the requirements and expectations under the Advisers Act. While advisers may purchase off-the-self or template compliance documents, it is clear that the documents should be tailored to reflect the actual operations of the adviser. The SEC has long placed an emphasis on creating a culture of compliance and the SEC will continue to police this area in all examinations. Without a strong compliance framework, many CCOs that maintain non-compliance duties may find themselves stretched thin attempting to comply with the compliance expectations.

Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.

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