The Monsters of Compliance – The Mummy


Ignore the warning at your peril. The archaeologists were told to be careful with the Imhotep’s mummy. He had been punished for trying to resurrect his forbidden lover. In the 1932 version, Boris Karloff’s Imhotep was mummified alive for his crime. The archaeologists had been warned not to read the Scroll of Thoth. It brought Imhotep back to life. Then the horror begins.

A firm is at peril for ignoring the warnings of the Securities and Exchange Commission. The clearest warning is when you get a deficiency letter. The SEC will sanction investment advisory firms for repeatedly ignoring problems with their compliance programs. Last week the SEC sanctioned three firms for failing to fix identified problems.

“After SEC examiners identified significant deficiencies, these firms did little or nothing to address them by the next examination. Firms must fix deficiencies identified by our examiners.” – Andrew Bowden, director of the SEC’s National Exam Program

According to the SEC’s orders against New Orleans-based Equitas Capital Advisers, the firm failed to adopt and implement written compliance policies and procedures and conduct annual compliance reviews to satisfy the Compliance Rule. Equitas made false and misleading disclosures about historical performance, compensation, and conflicts of interest, and it inadvertently yet repeatedly overbilled and underbilled its clients. Many of these violations occurred despite warnings by SEC examiners during examinations of Equitas in 2005, 2008, and 2011. The firm failed to disclose these deficiencies to potential clients in response to questions in certain due diligence questionnaires or requests for proposals.

The SEC has said many times that the first thing the examiners will do when they return is to verify that the firm has fixed the deficiencies identified in the last examination. The only surprise with the Equitas case is that it took so long to bring sanctions given the three prior visits.

The warnings are there for a reason. Comply with them or beware the consequences.


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