SEC Sues Investment Advisers For Compliance Failures, Part 2

The second of three cases the SEC’s Asset Management Unit brought against registered investment advisers on November 28th, In re OMNI Investment Advisors Inc., Admin Proc. File No. 3-14643 (Nov. 28, 2011), was much like Asset Advisors. OMNI, based in Draper, Utah, had about 190 clients with approximately $65 million in assets under management. The SEC says OMNI failed entirely to adopt and implement a compliance program or a code of ethics between September 2008 and August 2011.   

This was unwise, as Section 206(4) of the Advisers Act and Rule 206(4)-7 require that a registered investment adviser: (1) adopt and implement written compliance program, (2) review the adequacy and effectiveness of that program each year, and (3) designate a chief compliance officer.

Also, Section 204A of the Advisers Act and Rule 204A-1 together require that a registered IA establish, maintain and enforce a written code of ethics that includes: (1) a standard of business conduct reflecting the adviser’s and its supervised persons’ fiduciary obligations, (2) the requirement that all staff comply with the federal securities laws, (3) requirements that access persons submit for review a securities transaction report on a quarterly basis and a securities holdings report upon hiring and then at least annually thereafter, and submit for pre-approval any purchase of securities in an initial public offering or limited offering, (4) the requirement that supervised persons report any code violations to the CCO, and (5) the requirement that the code and any amendments are provided to supervised persons and the persons provide a written acknowledgement of their receipt.

OMNI didn’t do any of that.  When the SEC’s exam staff called on November 2, 2010, the firm hastily assembled a compliance manual that it dated the next day.  Needless to say, the manual was not specifically tailored to OMNI’s business.  The ensuing exam revealed that OMNI’s advisory representatives were completely unsupervised between September 2008 and November 2010.  During the same period, no one was functioning as OMNI’s CCO.  The compliance manual dated November 3, 2010, named OMNI’s owner, Gary Beynon, as CCO.  Unfortunately, Beynon was serving on a religious mission to Braziland did not actually do any supervisory or compliance work for OMNI over the next nine months. 

A subpoena followed in May 2011.  Included in OMNI’s document production to the Enforcement staff were a number of client advisory agreements, supposedly signed by Beynon on various dates between November 2010 and May 2011.  It turned out, though, that Beynon actually signed all of them on a single day, just before the documents were produced to the SEC.  

The Commission found that OMNI violated the statutes and rules cited above, and that Beynon aided and abetted the firm’s violations.  OMNI withdrew as a registered investment adviser in August, voluntarily or otherwise.  Beynon received a wide-ranging industry bar.  Given the backdated documents he submitted to the Commission’s staff, he’s lucky that’s all he got.

I think there are three lessons to be drawn from this case and Asset Advisors. 

Lesson No. 1:  If you are an investment adviser and the SEC’s exam staff sends you a deficiency letter, treat it seriously.  Address the staff’s concerns and move on.  If you ignore it, as essentially happened here, the exam staff will refer the matter to Enforcement and let them take care of you.

Lesson No. 2:  If you are small, your size won’t save you.  These were not big shops, with only $27 million and $65 million, respectively, in assets under management.  But dangerous frauds can happen in places that size, and the SEC is signaling here that such places can be worth its Enforcement resources. 

Lesson No. 3:  These are smart cases for the SEC to bring, and should be considered alongside the Commission’s July 2011 administrative action against Janney Montgomery Scott for failing to establish and enforce an insider trading compliance program.  The SEC does not have enough staff to regularly examine the investment advisers and broker-dealers under its purview.  And the cavalry is probably not on the way.  By targeting bad actors, it warns registered entities everywhere that they should get their compliance houses in order.  These kinds of cases have a lot of deterrence value.