SEC Exam Success with the Ex-Examiners

Current Exam Trends and Enforcement Actions of Note

MyComplianceOffice presents our co-hosts from NorthPoint Compliance as they discuss current Exam Trends and Enforcement Actions of note during our joint August Webinar. 

Victoria Hogan, CFA, President of NorthPoint Compliance worked for over six years as a compliance examiner in the New York Regional Office of the U.S. Securities and Exchange Commission. Victoria also spent two years as a compliance officer at Fortress Investment Group. Victoria graduated magna cum laude from The College of New Jersey.

Colleen Montemaraon is a consultant at NorthPoint. Prior to joining NorthPoint, Colleen worked for more than six years as a compliance examiner in the New York Regional Office of the US Securities and and Exchange Commission.Colleen graduated magna cum laude from St. Thomas Aquinas College with a BS in Finance.

 You can download a full copy of the slides from this webinar.



Full video transcript available below:

I would like to discuss some of the current exam trends so you can focus on these areas also. For the past few years, never been examined firms have been a focus and continue to be so. We've actually seen quite a few of our private fund clients who registered within the past five years examined as part of this initiative. I experienced then that these are shorter exams and may even be offsite. There are also various sweep examinations going on right now. If you are not familiar with sweeps, they are highly focused exams on a specific area. The staff will often emphasize these areas in full exams too.

The first is the ReTIRE initiative which begun in June 2015. This focuses on how retail investors at or nearing retirement are being served by investment advisers. You want to make sure that you have documentations to support recommendations to these types of clients and review how you are marketing to this demographic. As it has been for quite some time, cybersecurity remains a focus. Make sure that you have written policies and procedures in this area. Being that it is an election year, the SEC is also focusing on pay-to-play. It is a good idea to review your policies with employees and assure that they are aware of any reporting requirements, or donation thresholds.

Another thing you can do, and this is something we do as consultants, is test check reported donations to publicly available information such as The SEC is also focusing on adviser's practices related to share class recommendations and compliance oversight of this process. If this applied to your firm, you should take a look at the July 13, 2016 national exam program risk alert on this topic.

The final point I want to discuss is the SEC staffing. In February announced plans to add 100 investment adviser examiners by October of this year. They are using a combination of new examiners and transferring staff from the broker dealer area. This increase in staff will allow the SEC to increase the number of investment adviser exams it conducts. However, it will take some time to see the effect because new examiners will need to be trained.

Now I'd like to go over some enforcement actions of note. The majority of examinations results in a deficiency letter, and even many of those that are referred to the branches of enforcement do not actually result in an enforcement action. There are some reason enforcement actions where some of the findings stemmed from an examination. The first has to do with recidivist violations.

Trust and investment advisers were cited by OC examiners in 2005 and 2007 for failure to complete an annual compliance review or develop a compliance manual. Again they were examined in 2011 and the same deficiencies were noted amongst other things. Since trues and investment advisers failed to take corrective action, what was a deficiency rose to the level of enforcement. As a result of the action, the firm must engage in independent compliance consultant for at least three years to conduct this annual review. Also the firm and the Chief Executive Officer had to pay a $50,000 penalty, and the Chief Compliance Officer was fined $10,000.

The second case is a pending action regarding failure to produce documents and share class recommendations amongst other things. Stephen Allison was a sole owner and Chief Compliance Officer of Allison, LLC. As part of an exam in April 2014, the exam staff sent a written request for certain basic records. Mr. Allison failed to provide the requested documents, the staff made several additional attempts to gather the documents. Mr. Allison still failed to produce the majority of them.

Mr. Allison was also a registered representative of a broker dealer and invests their client in mutual fund shares with 12b-1 fees of which he received a portion, while alternative share classes with lower fees were available. Mr. Allison is charged for failing to make certain books and records available to the SEC, and engaging in fraudulent and deceptive business practices amongst other things. This case shows the importance of responding fully to a document request list, and also the types of enforcement actions we may see as a result of the current share class initiative.

In the final action, Louis Blazer, a Blazer Investment Advisers took 2.35 million dollars from five clients in non-authorized transactions to invest in two movie projects in which he had a financial interest. He further lied to the exam staff when they questioned this suspicious transactions. Mr. Blazer claims that the transactions were approved by clients and fabricated documents to support this statement. He has been barred from the industry and has agreed to a settlement which is still pending court approval. While this case appears to be outright fraud, it does show how important it is to be upfront with the exam staff.

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