SEC’s Asset Management Unit Picks Up Its Game
The SEC’s Asset Management Unit is making its presence felt. Last week the unit brought a slew of cases against investment advisers and hedge funds that put the group on the forefront of the Enforcement Division’s efforts to remake itself(link is external) after the Bernard Madoff fiasco. Though the two groups of cases were obscured by Judge Rakoff’s rejection(link is external) of the proposed Citigroup settlement, each group is important for its own reasons. The first, a series of three administrative actions brought against small investment advisers, puts IAs around the country on notice that they need to get their compliance programs in order or face enforcement action that could put them out of business. The second group, actions against a number of hedge funds that were misusing assets and fraudulently misrepresenting their numbers to auditors and investors, highlights the Division’s burgeoning ability to make cases out of data, and without the help of whistleblowers.
Cady Bar the Door will be examining these cases over the next week or so in a series of posts. First up is In re Asset Advisors, Admin. Proc. File No. 3-14644 (Nov. 28, 2011). Until recently, Asset Advisors was a registered investment adviser based in Troy, Michigan with 325 discretionary accounts and $27 million in assets under management. Carl Gill, 57, was its owner and, for a time, its chief compliance officer.
The firm’s issues first arose with two examinations by the SEC’s exam staff. Its primary problem – and the reason the firm is no longer functioning as an investment adviser – is that it did not effectively respond to either one. Gill first heard from the SEC in April 2007. It turned out that Asset Advisors did not have a written compliance program or a code of ethics at all, and did not even realize they were required.
While Gill and Asset Advisors took some corrective measures, their commitment to compliance did not run deep. They in fact took almost no steps to implement the compliance policies and procedures in any meaningful way. The firm provided no training to its employees, and in two out of the next three years failed to conduct an annual review of its compliance manual.
Another exam followed in December 2009. Based on that exam, the staff sent Asset Advisors a deficiency letter in June 2010 noting that:
the compliance manual did not address certain aspects of Asset Advisors’ business and lacked detail as to how compliance processes would be executed;
the manual was deficient in setting forth policies and procedures relating to portfolio management processes, suitability of variable annuity products, and safeguarding client’s assets and private information;
the one annual review the firm did conduct, in 2009, was wholly inadequate.
Instead of responding immediately, Asset Advisors waited nine months to incorporate the staff’s comments into its compliance manual.
The Commission found violations of two sets of statutes and rules. Very briefly, Asset Advisors was found to have failed to implement a written compliance program or a code of ethics for its supervised persons. Asset Advisors was compelled to withdraw its registration as an IA, transfer its existing advisory accounts to a different, fully compliant IA, and pay a civil money penalty of $20,000. Gill himself was not sanctioned.
We’ll go into the specific rules violations, most of which are common to the three IA cases -- as well as some lessons from this matter and the other cases -- in ensuing posts.