Articles Tagged with CCO

On October 31, 2018 the Financial Industry Regulatory Authority published Regulatory Notice 18-37, which announces the commencement of the 2019 Renewal Program for registered investment advisers and broker-dealers.  The 2019 Renewal Program is set to begin on November 12, 2018.  On that day, FINRA will release Preliminary Statements to all registered firms via E-Bill.  Firms are required to remit full payment of their Preliminary Statements by December 17, 2018.

The Preliminary Statements contain various fees for renewal of state registrations and notice filings.  For individuals who are renewing their broker-dealer registrations, FINRA will assess a fee of $45.  For investment adviser firms and their representatives who are renewing their registrations, any IARD system fees will be featured on their preliminary statements.  For FINRA-registered firms that have one or more branch offices, FINRA will assess a renewal fee of $20 per branch.  FINRA will, however, waive one branch renewal fee for each FINRA-registered firm.

Firms may pay their Preliminary Statement fees via E-Bill, a wire transfer, or a check.  FINRA’s preferred method of payment is E-Bill.  If a firm does not pay the Preliminary Statement fees by December 17, it will be charged a late renewal fee.  The late fee will amount to either 10 percent of a firm’s final renewal assessment or $100, whichever is greater, but the late fee can be no more than $5,000.  FINRA also warns firms that failure to pay the Preliminary Statement fees by the December 17 deadline could result in the firms becoming unable to do business in the areas where they are registered.

A new limited broker/dealer classification framework at the federal level has been created as the result of a recent SEC Order approving a FINRA rule proposal seeking to address the longstanding industry desire for augmented exemptive relief and/or limited registration classifications for broker/dealers that restrict their activities to certain designated corporate finance transactions. The new federal broker/dealer registration category known as Capital Acquisition Brokers (“CABs”), which some observers have dubbed a “lite” form of broker/dealer registration, is the latest development in this area of securities regulation, and follows a recent string of federal and state no-action letters providing exemptive relief to so-called Mergers and Acquisitions (“M&A”) Brokers. However, enthusiasm for the new CAB Rules should be tempered somewhat in that: (1) the CAB Rules do not provide exemptive relief—i.e., they do not allow firms to avoid registration but instead set up a form of registration that is meant to be somewhat less onerous; (2) CAB registration still requires that CAB firms adhere to many of the same strictures required of full broker/dealers; and (3) opting to be regulated as a CAB may require reassessment as time goes on to the extent that a firm’s business activities change. While formally approved by the SEC, FINRA’s CAB Rules are not as yet effective. FINRA will publish the effective date in an upcoming Regulatory Notice. The full set of CAB Rules approved by the SEC may be found online at http://www.finra.org/sites/default/files/SR-FINRA-2015-054-amendment-2.pdf.

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A compliance advisor working for City Securities Corporation (“City Securities”) has agreed to a Letter of Acceptance, Waiver and Consent (AWC) in a FINRA enforcement case alleging deficiencies in the way the advisor performed his compliance duties at the broker-dealer.  John Walter Ruggles, who first became registered in 1993 and became associated with City Securities in May 2014, was charged with failing to generate monthly Municipal Continuing Disclosure Reports (MCDs), which are required in order to comply with the Municipal Securities Rule Making Board’s (MSRB) disclosure requirements.  More specifically, among Ruggles’ tasks were to populate the MCDs with transaction data on behalf of City Securities’ customers and to email the data to the private client group, who would then routinely use the information contained in Ruggles’ emails to prepare customer satisfaction letters to City Securities’ clients regarding recent municipal bond trading activity.

The AWC alleges that Ruggles’ supervisor confronted Ruggles with the fact that he had not received the MCDs due for February 2015, and asked Ruggles to produce documentation showing that Ruggles had performed the tasks going back to June 2014.  Ruggles provided six printed emails to his supervisor in response to the supervisor’s request.  Those emails contain the trade details that were supposed to have been included in the MCDs.  The supervisor, however, attempted to verify the data contained in Ruggles’ printed emails, but in investigating the situation found (1) that City Securities’ email backup files did not contain any of the emails that Ruggles provided, (2) that several of the execution dates referenced on the bond trades in the emails were different from the actual execution dates as reflected in the transaction data, (3) that for a period of approximately five months, the firm’s compliance system showed that Ruggles had not opened and viewed the MCDs from which he was supposed to have taken the data, and (4) that the falsified emails contained erroneous dates in the subject lines.

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In August of this year the Securities and Exchange Commission (“SEC”) settled an administrative proceeding that related to statements an investment adviser made during the SEC’s on-site examination. The adviser at issue, Parallax Capital Partners, LLC, is a registered investment adviser that focuses primarily on mortgage-backed bonds and other similar fixed income securities. Parallax also advises a private fund in addition to providing advisory services to individuals and other entities. During an examination of Parallax that the SEC conducted in April 2011, the firm’s Chief Compliance Officer represented to the examination staff that he had performed and documented the annual compliance review required by Adviser’s Act Rule 206(4)-7 for the year 2010. The CCO further represented that the review and documentation had been conducted in February 2011, and provided the examination staff with a memorandum purportedly documenting the compliance review for 2010 that stated: “This memo documents that I have performed the review and reported significant compliance events and material compliance matters.”

The SEC examination staff was able to determine, by a review of the metadata attached to the compliance memorandum, that it had not been drafted in February 2011 as the CCO had represented, but instead that it had been created and completed in April 2011, just three days prior to the onsite examination and after Parallax received notice of the impending examination.
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On August 5th, 2015 in a decision that has implications for registered investment advisers and broker-dealers, SEC judge Cameron Elliot ruled on an enforcement action regarding the extent of liability for Compliance Officers in In the Matter of Judy K. Wolf, available here. Sanctions were not imposed against Ms. Wolf due to the violation being “decisively outweighed by the remaining public interest factors: egregiousness, degree of harm, and deterrence.” However, it was found that Wolf purposefully lied about her records violation.

In In the Matter of Judy K. Wolf, Judge Elliot stated he believed the further sanction against Wolf would be pursuit of “the low-hanging fruit” that is compliance officers.
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A recent enforcement action settled in an administrative proceeding brought by the Securities and Exchange Commission (“SEC”) underscores the importance for investment advisers to adopt and follow rules designed to prohibit inappropriate gifts to and from clients by investment adviser personnel. In a matter previously discussed on our blog, Guggenheim Partners Investment Management, LLC (“Guggenheim”) settled charges, without admitting or denying any violations that it had failed to adopt, or implement reasonable compliance procedures as required by Rule 206(4)-7 under the Investment Adviser’s Act designed to regulate gifts and entertainment provided to and from the adviser or its personnel.

More specifically, the SEC’s Order instituting administrative proceedings recited that Guggenheim’s compliance manual adopted a rule that required supervised persons to seek and obtain approval of the Chief Compliance Officer before personnel could receive any gift above an established de minimis value that was defined in the manual as being $250.00 or less. Despite this policy, between 2009 and 2012 at least seven Guggenheim employees took 44 or more flights on private planes of Guggenheim clients, none of which were reported to the Chief Compliance Officer as required by the policy. The compliance log reflected only one such flight that was only recorded because the flight had been mentioned to the Chief Compliance Officer after the flight occurred. The Commission found that Guggenheim failed to enforce its own policies with respect to gifts and entertainment and failed to implement compliance policies and procedures regarding gifts and entertainment.
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In SEC Chairwoman Mary Jo White’s opening statement to about 1,000 broker-dealer compliance officials at the Annual Broker-Dealer Compliance Outreach Program, she was clearly dismissing a growing sense that compliance professionals are being singled out by the SEC enforcement program, “To be clear, it is not our intention to use our enforcement program to target compliance professionals” she said, adding “We have tremendous respect for the work that you do. You have a tough job in a complex industry where the stakes are extremely high.” White also drew on the close similarities between the SEC and compliance officials, “Like you, much of our work at the Commission centers on protecting investors. We want to support you in your efforts and work together as a team.”

White’s statement came shortly after a public difference of opinion between commissioners Daniel Gallagher and Luis Aguilar. Gallagher, who issued dissents in the SEC’s cases against BlackRock Advisors in April and SFX Financial Advisory Investment Management in June, argued that the SEC rules governing compliance officials issued in 2003 are vague and leave too much uncertainty “as to the distinction between the role of CCOs and management in carrying out the compliance function.” In addition to the ambiguity in the rules, the only rule interpretations which have been provided by the SEC have come in the form of enforcement actions which Gallagher wrote “are undoubtedly sending a troubling message that CCOs should not take ownership of their firm’s compliance policies and procedures, lest they be held accountable for conduct that is the responsibility of the adviser itself.” Gallagher suggested that the SEC consider either amending the rules or providing commission-level guidance which would help clarify what is expected of compliance officers in their roles.
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In a matter underscoring how important it is for investment advisers to dedicate sufficient resources and attention to their compliance program, the Securities and Exchange Commission (“SEC”) has sanctioned a firm for multiple compliance failures. On June 23, 2015 the SEC instituted cease-and-desist proceedings against Pekin Singer Strauss, a registered investment advisor firm boasting approximately $1.07 billion in AUM which primarily serves high-net-worth clients.

Among the violations cited, the order states that Pekin Singer failed to conduct timely annual compliance program reviews in 2009 and 2010 and failed to implement and enforce provisions of its policies and procedures and code of ethics during this same period. The firm has been ordered to pay a civil money penalty in the amount of $150,000.
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The Securities and Exchange Commission (SEC) is taking an increased interest in examining chief compliance officers (CCO) to determine whether enforcement action should be taken against them. At the Investment Adviser Association’s annual compliance conference, CCOs were given a number of stern warnings. Director of the SEC’s Division of Investment Management Robert Plaze spoke about changes and improvements being made by the SEC. He warned CCOs that a newly created Asset Management Unit, which is part of the Division of Enforcement, “is dedicated to suing you.” He also claimed that the new unit will be staffed with people who understand the asset management business. It will also collaborate with both the Investment Management Division and the agency’s Office of Compliance Inspections and Examinations. Mr. Plaze stated that the unit will make the SEC’s oversight of registered investment advisers more efficient, allowing it to be able to perform more effective examinations. These warnings should concern CCOs who have taken a supervisory role within their firm.

The SEC has the authority to impose sanctions on people who are associated with a broker-dealer or an investment adviser if those people have reasonably failed to supervise. Both broker-dealers and investment advisers employ legal and compliance personnel to provide advice to them and their firms regarding the application of laws and regulations. One major issue that arises is whether the CCO is considered a supervisor within the firm. If so, the CCO could be subject to sanctions by the SEC for failure to supervise.
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