SEC Sanctions CCO for Custody Rule Violations


The Securities and Exchange Commission issued an order against Mark M. Wayne, the president, Chief Executive Officer, and Chief Compliance Officer of Freedom One Investment Advisors, Inc. for violations of the the custody rule under the Investment Advisers Act. Although that’s the headline, the SEC action shows many other compliance failures.

First, the custody issues. From 2008 through 2010, Freedom One had custody of client assets and violated the custody rule’s requirement that it have an independent public accountant conduct annual surprise exams to verify those assets. For 2008, Freedom One engaged a national public accounting firm to perform a surprise exam, but failed to follow through with its completion. For 2009 and 2010, another national public accounting firm conducted surprise exams but they were insufficient. Freedom One limited the exams to only a subset of the accounts.

In 2010, the new custody rule came into effect and required Wayne to have the custodian send account statements directly to his clients. He failed to do so.

The SEC charged Wayne with aiding and abetting and causing these violations because as CEO, a principal, and CCO of Freedom One, he took no action to ensure compliance. Apparently, he delegated responsibility for the 2009 and 2010 surprise exam to someone who had no compliance training or experience and who did not know which accounts Freedom One had custody over. Wayne approved Freedom One’s compliance manuals. Wayne he appointed recordkeeping responsibilities to someone who lacked the necessary skills and did not provide her with adequate support and training to accurately maintain Freedom One’s books and records.

Granted those actions are all violations but don’t seem so egregious that the SEC would bring an enforcement action. The order spends a few paragraphs describing some poor accounting practices, but the problem is the movement of money between the adviser and its record-keeping affiliate. The order states no improper movement of assets between the client and the adviser.

The SEC not only brought an action against the adviser, it also brought charges against the accountants who failed to complete the surprise examination in 2008.

The action shows me that the SEC is serious about custody rule compliance, even when client assets are not in danger.