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Adviser’s Principal Banned for False Statements of Eligibility, Failure to Maintain Records and Compliance Manual

Insight Benjamin L. Douglas Benjamin L. Douglas · March 02, 2015

A February SEC enforcement case provided a reminder to investment advisers of the importance of meticulous compliance with requirements regarding record retention and compliance manuals.  In the order*, the SEC settled an administrative proceeding for various alleged offenses by a small investment adviser and its owner.  Notably brazen were the adviser’s false representations regarding its eligibility even to register with the SEC.  The SEC found that, for several years, the adviser overstated its assets under management, falsely claiming to manage over $25 million in order to exceed the threshold for SEC registration.  Then, when that threshold was further increased by Congress, the adviser claimed to have relocated to Wyoming (the sole state that does not register investment advisers) in order to maintain apparent eligibility for SEC registration, even though its business was in fact conducted from Nevada and New Jersey.

The other allegations are more relevant for the vast majority of advisers who do not make false statements on their Form ADV.  Having established and maintained SEC registration, thereby inviting the scrutiny of its examiners, this adviser then failed to adopt and maintain required written policies and procedures or a code of ethics.  When confronted, the adviser’s principal admitted that he had not reviewed the firm’s code of ethics (which he could not actually produce for SEC staff) while the adviser was registered with the SEC.  The firm also failed to maintain, and to produce for SEC staff, various books and records required by SEC rules.

In addition to the revocation of the adviser’s registration and payment of a civil penalty, its principal has agreed to be banned from association with businesses regulated by the SEC.

While the outright false statements in this matter are beyond the pale, there is still a lesson for honest investment advisers.  All firms should take this case as a reminder that the SEC examination staff takes very seriously the requirement that registrants maintain proper books and records.  In order to be prepared for examinations and to run its businesses effectively, an adviser must adopt, implement, and regularly (and at least annually) review and update written policies and procedures covering all regulated aspects of its business, including:

  • trading (such as soft dollar arrangements, allocations, and best execution)
  • portfolio compliance
  • avoidance of insider trading violations
  • all communications with current and prospective clients
  • personal trading by supervised persons
  • record retention
  • asset valuation

In addition, an adviser must maintain and enforce a written code of ethics that, at a minimum, requires that certain employees:

  • follow appropriate standards of conduct
  • comply with applicable federal securities laws
  • report (for the adviser’s review) their securities holdings and transactions
  • pre-clear personal participation in IPOs and limited offerings
  • report any violations of the code to the CCO or other designated persons
  • provide a written acknowledgement of their receipt of the code and any amendments

For questions regarding any of the requirements applicable to registered investment advisers, please contact a member of Rimon’s Investment Advisers and Other Asset Managers team.

*In the matter of Logical Wealth Management, Inc. and Daniel J. Gopen, February 19, 2015 (http://www.sec.gov/litigation/admin/2015/ia-4027.pdf).


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