From One CCO to Another: Don’t Lie to the SEC

Every once in a while, I think it’s important to get back to the basics. Since the adoption of the compliance rules in 2004, the Securities and Exchange Commission staff has repeatedly stated that the intent of the rules were not to hunt CCOs. Great pains have been made to enlist CCOs support in ensuring that advisers demonstrate a strong compliance culture. SEC actions against CCOs have been rare and usually related to clear wrongdoing, like lying to the SEC.

On September 17, 2020, the SEC took action against a dually-registered investment adviser and broker dealer and its former CCO[1] for a string of compliance failures relating to the firm’s trading practices. The firm employed an active trading strategy in which clients paid commissions on a per-trade basis (SIDE NOTE: advisers should be very careful about such arrangements as they can often conflict with an adviser’s fiduciary duty). The firm claimed to have surveillance of commission costs and turnover rates as a vital part of its compliance program. During an exam of the firm, FINRA found that the firm did not have any written procedures relating to the surveillance program and was not able to evidence any such review.

As a result of the FINRA findings, the firm amended its written procedures to include procedures related to customer transaction reviews, with the responsibility for such reviews resting with the CCO. As with most written procedures, they are only of value when followed. No such reviews were conducted and the reports that were identified to support a review didn’t even contain the necessary information.

The SEC staff later conducted a review of the firm and requested records supporting such reviews. In response to the request, the firm, through the CCO produced reports that had been altered by the CCO to give the appearance that a timely review was conducted. The CCO provided the exam staff with reports in which she “whited out” the date printed information from the report and made handwritten notations to make the review appear contemporaneous with the data. During the SEC’s enforcement investigation, the CCO again produced documents altered with white out. In her sworn testimony, the CCO finally admitted that these reports were altered. As a result, the firm was fined $1.7 million and CCO was fined and barred from the industry.

The moral of the story. DON’T. EVER. LIE. TO. THE. SEC. EVER.

To speak with one of our regulatory experts, email us at info@cssregtech.com.

[1] In re: Gilder Gagnon Howe & Co. LC and Bonnie M. Haupt; IA Release 5582; September 17, 2020.


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