It is imperative for a registered investment adviser upon being notified by the SEC during an examination that is has deficiencies, to work to resolve those deficiencies before the next SEC examination. In the Matter of Trust & Investment Advisors, Inc., Larry K. Pitts, and George M. Prugh, IAA Release No. 4087/May 18, 2015, a SEC registered investment adviser based in Indiana and its two principal officers, were the target of a recent SEC enforcement order and sanctions for failure to cure deficiencies noted during previous SEC examinations.
During three on-site examinations at the adviser in 2005, 2007 and 2011, the SEC discovered and alerted the adviser to deficiencies in the areas of performance, advertising and compliance. For example, during the 2005 examination, the SEC pointed out to the adviser that it had failed to develop compliance procedures as required under Rule 206(4)-7 under the Investment Advisers Act of 1940. In a written response to the SEC, the adviser stated that it was working on those compliance procedures. However, again during the 2007 examination, the SEC noted that the procedures were still not completed and noted other obvious compliance deficiencies. Subsequently, the adviser once again stated to the SEC, that it would complete those procedures and eliminate the other compliance deficiencies. In spite of all that, during the 2011 examination (6 years from the time the compliance procedures deficiency was first noted), the SEC discovered that the adviser had made no progress on the compliance deficiencies.
During the series of exams conducted by the SEC on the adviser over the six year period, it was also noted by the staff that the adviser provided misleading performance information in its marketing materials. As in the case of the compliance deficiencies, although the adviser made repeated written statements to the SEC that it would correct the deficiencies, the SEC found in 2011 that the adviser had not eliminated the deficiencies. The two principals of the adviser cited in the enforcement action were the supervisory and decision makers at the adviser. Accordingly, the SEC believed that the adviser’s continued failure was the direct result of the failure of the two principals to ensure that the deficiencies were satisfactorily resolved. In order to settle the SEC’s enforcement action, the adviser and the principals have resolved to take certain action to resolve the areas of deficiencies, including the completion by each of the two principals of thirty (30) hours of compliance training. The matter was resolved through the SEC’s cease and desist order, order of censure and a payment of a civil penalty by each of the respondents.