The Securities and Exchange Commission today charged three investment advisory firms for repeatedly ignoring problems with their compliance programs. The sanctions come just one day after SEC Chairman Mary Jo White pledged to escalate enforcement against firms that fail to maintain strong compliance cultures.
On Oct. 23, the SEC charged Modern Portfolio Management (MPM), Equitas Capital Advisers, Equitas Partners, and its executives with failing to correct ongoing compliance violations at the firm despite prior warnings from SEC examiners.
The enforcement actions arise from the agency's Compliance Program Initiative, which targets firms that have been previously warned by SEC examiners about compliance deficiencies but failed to effectively act on those warnings. “Had the problems been addressed, the firms could have prevented their eventual securities law violations,” the SEC stated.
“The Compliance Program Initiative is designed to address repeated compliance failures that may lead to bigger problems,” Andrew Ceresney, co-director of the SEC's Division of Enforcement said in a prepared statement. “Firms must not only have policies and procedures in place, but also need to properly implement those policies and procedures.”
“After SEC examiners identified significant deficiencies, these firms did little or nothing to address them by the next examination,” added Andrew Bowden, director of the SEC's National Exam Program. “Firms must fix deficiencies identified by our examiners,” he warned.
According to the SEC's charges, MPM and its owners, G. Thomas Damasco and Bryan Ohm, failed to complete annual compliance reviews in 2006 and 2009 and made misleading statements on MPM's Website and investor brochure. One location on MPM's Website, for example, misleadingly represented that the firm had more than $600 million in assets, when it reported to the SEC during that same time period that the firm's assets under management were at most $359 million.
To resolve the charges, MPM, Damasco, and Ohm agreed to be censured and pay a total of $175,000 in penalties. Damasco and Ohm must complete 30 hours of compliance training, and MPM has agreed to designate someone other than Damasco or Ohm to be its chief compliance officer, and must retain a compliance consultant for three years.
The SEC also brought charges against Equitas Capital Advisers; Equitas Partners; owner David Thomas; chief compliance officer Susan Christina; and former owner and chief compliance officer Stephen Derby Gisclair. Specifically, the SEC has charged them with failing to adopt and implement written compliance policies and procedures and conduct annual compliance reviews to satisfy the “Compliance Rule” of the Investment Advisers Act
Under that ruel, investment advisers are required to adopt and implement written policies and procedures that are reasonably designed to prevent securities law violations. The rule requires advisers to review their policies and procedures at least once a year for adequacy and effectiveness of implementation. Advisers also must designate a chief compliance officer responsible for administering the policies and procedures.
According to the SEC, the Equitas firms made false and misleading disclosures about historical performance, compensation, and conflicts of interest, “and they inadvertently yet repeatedly overbilled and underbilled their clients.”
Many of these violations occurred despite warnings by SEC examiners during examinations of the Equitas firms in 2005, 2008, and 2011. “The firms, Thomas, and Gisclair failed to disclose these deficiencies to potential clients in response to questions in certain due diligence questionnaires or requests for proposals,” the SEC stated.
Gisclair also caused Compliance Rule violations and the incorrect billing of clients at Crescent Capital Consulting, an investment advisory firm that he opened in late 2010. Gisclair inflated the amounts of assets managed by Equitas and Crescent in filings to the SEC and improperly removed and retained nonpublic personal client information when he left Equitas.
In settling the charges with the SEC, Equitas Capital Advisers and Crescent have reimbursed all overcharged clients. Additionally, Equitas Capital Advisers, Thomas, and Gisclair agreed to pay a total of $225,000 in additional penalties. The Equitas firms and Crescent have also hired independent compliance consultants, and the Equitas firms and Gisclair must give clients notice of the SEC enforcement actions.