Three Compliance Failures

One for the money, two for the show, three because uh – uh, comes before four, and here we go!

 – Tigger

On Monday, the Securities and Exchange Commission announced not one, not two, but three actions against investment advisers for failing to put in place compliance procedures designed to prevent securities law violations. The firms charged with compliance failures in separate cases are Utah-based OMNI Investment Advisors Inc., Minneapolis-based Feltl & Company Inc., and Troy, Mich.-based Asset Advisors LLC. The SEC also charged OMNI’s owner Gary R. Beynon, who served as the firm’s chief compliance officer.

Under Rule 206(4)-7 of the Investment Advisers Act (the “Compliance Rule”) registered investment advisers are required to adopt and implement written policies and procedures that are reasonably designed to prevent, detect, and correct securities law violations. The Compliance Rule requires annual review of the policies and procedures for their adequacy and the effectiveness of their implementation. It also requires the designation of a chief compliance officer, responsible for administering the policies and procedures.

In the case of Asset Advisors, the SEC had previously warned the firm about compliance deficiencies. In 2007, the SEC examined Asset Advisors and issued a deficiency letter. The firm waited until November 2009 to update the compliance manual to incorporated the SEC comments. That happened to coincide with an announcement that the SEC was coming for another examination. The failings:

  • The firm did not collect from its staff written acknowledgements that the staff received the code of ethics.
  • The firm did not collect any quarterly transaction reports from any of its access persons.
  • The firm did not pre-clear any of its access person’s transactions in initial public offerings or limited offerings.
  • The firm failed to at least annually review its written policies and procedures and the effectiveness of their implementation.

Asset Advisors received the nuclear punishment. The SEC required the firm to close operations and transfer its advisory accounts to another SEC-registered investment adviser with a compliance program.

Feltl & Company was a dually-registered broker-dealer and investment adviser. The SEC charged the firm with failing to adopt and implement comprehensive written compliance policies and procedures. This failure resulted in Feltl engaging in hundreds of principal transactions with its advisory clients’ accounts without making the proper disclosures and obtaining consent in violation of Section 206(3) of the Advisers Act. It also resulted in Feltl charging undisclosed fees to its clients participating in Feltl’s wrap fee program by charging both wrap fees and commissions in violation of Section 206(2) of the Advisers Act. The SEC laid the blame for Feltl’s compliance breakdown on its failure to invest necessary resources in the firm’s advisory business as it changed and grew in relation to its brokerage business.

OMNI’s was penalized for a complete failure to adopt and implement a compliance program between September 2008 and August 2011. In 2007, the SEC examined OMNI and issued a deficiency letter noting several issues, including OMNI’s failure to conduct an adequate annual review of its compliance program. In November 2010, the Commission began another examination of OMNI. When the exam began, the Commission was provided with a Compliance Manual dated November 3, 2010, which was one day after OMNI responded to the examiners’ request to initiate an examination. OMNI was unable to provide the Commission with any compliance manual adopted and implemented prior to November 3, 2010. Additionally, OMNI was unable to provide any policies and procedures that would have been in effect prior to November 3, 2010. The November 3, 2010 Compliance Manual appeared to be an off-the-shelf compliance manual that included language from both broker-dealer and investment adviser regulations, and was not specifically tailored to OMNI’s business.

OMNI was owned by Gary Beynon who also served in the role of CCO after the previous CCO left in 2008. The big problem with OMNI was that Beynon left for a three-year religious mission to Brazil in 2008, leaving OMNI’s advisory representatives completely unsupervised. He wanted to keep the firm in business while he was away so he could return to the firm when his religious mission ended.

The SEC expects more when you are responsible for other people’s money.