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SEC Identifies Lack of Compliance Programs

SEC Identifies Lack of Compliance Programs

Investment adviser firms’ growing use of outside chief compliance officers has prompted the U.S. Securities and Exchange Commission to identify several that are not effectively implementing compliance programs.

The Office of Compliance Inspections and Examinations has detailed the results of over a dozen examinations conducted by the SEC of investment advisers and investment companies’ CCOs. While some were found to be generally effective in administering compliance programs, others failed to ensure that the advisers adhered to compliance policies, as well as other issues. A risk alert issued by the OCIE cautioned funds and advisers with outsourced CCOs to make certain that their compliance chiefs have enough authority to effectively implement compliance programs and policies.

According to the OCIE risk alert, some outsourced compliance chiefs could not identify what business or compliance risks their firm face, while others did not know whether the firm had written policies and procedures to mitigate risks.

The OCIE notes a growing trend in the investment management industry of outsourcing compliance to third parties. One study by Charles Schwab Corp. found that 38 percent of firms were outsourcing some aspect of their compliance function. The reported reason for such outsourcing is to lower costs and potentially lower risk.

According to the risk alert, successful CCOs have regular, in-person communication with the firms with which they are employed and are given sufficient support, and enough access to documents and information by the advisers, to effectively perform their role.

In early November, the SEC reported that Fenway Partners, a private equity adviser, and four executives – including its COO – would have to pay a combined $10.2 million to settle claims stemming from failure to disclose conflicts of interest around payments to an affiliate and former employees. High-profile SEC actions against CCOs are becoming more prevalent.

In April 2015, BlackRock Advisors as penalized $12 million by the SEC for breach of fiduciary duty due to the firm’s failure to disclose conflicts of interest posted by a prominent fund manager’s outside business venture. The SEC also named and sanctioned CCO Bartholomew Battista, stating that he contributed to the regulatory lapses.

A new compliance consultant has been hired by the U.S. Department of Justice to help its prosecutors in determining which cases to bring.

The team of investment fraud lawyers at Starr Austen & Miller LLP fights for the protection of investors and handles cases involving securities arbitration misrepresentation, overconcentration, broker fraud, negligence and breach of trust.