Readers of our Legal News: Investment Management Update can expect reports of enforcement actions by the SEC and other securities regulator authorities. We include reports that we believe will be especially helpful to our readers in complying with relevant laws and regulations. The following enforcement summary helps to demonstrate the importance of maintaining written compliance policies and procedures as required by registered investment advisers under the Investment Advisers Act of 1940 (the Act) and, most important, to implement effective steps to remedy past violations of the Act.
In the Matter of Consultiva Internacional Inc. (SEC Release No. 3441, August 3, 2012), the SEC imposed various administrative sanctions against Consultiva, a registered investment adviser headquartered in Puerto Rico. The sanctions were a result of Consultiva’s failure to adopt and implement written compliance policies reasonably designed to prevent violations of the Act and its rules, as required by Section 206(4) and Rule 206(4)-7 under the Act, and to remedy past deficiencies noted by the SEC during a previous examination. Back in 2005, the SEC, during a routine exam of Consultiva, informed the adviser that its compliance program and written compliance manual had several deficiencies. The SEC came back to conduct another exam in 2010 and noted that the 2005 deficiencies had not been corrected. Among other things, the SEC had noted in 2005 that it did not believe that the designated chief compliance officer had the capacity to effectively oversee the adviser’s compliance operations.
Generally, when the same deficiencies are noted by the SEC in consecutive examinations, administrative sanctions will result. In this case, although the adviser took some remedial actions following the 2010 examination (it hired a compliance consultant to evaluate the adviser’s compliance practices and procedures and started to implement the consultant’s recommendations), the SEC apparently took the position that such actions were too little and too late.
In order to settle the enforcement matter, the adviser agreed to the following, among other things: the issuance of a cease-and-desist order from committing future violations of Sections 204A and 206(4) of the Act and Rules 204A-1 and 206(4)-7 thereunder; a censure; a civil penalty of $35,000; and engagement of a compliance consultant and periodic reports back to the SEC as to the progress being made to correct the deficiencies cited by the SEC during its examinations.
This enforcement matter helps to underscore the importance of having effective and comprehensive compliance policies and procedures and to timely complete the remedial steps that a registrant informs the regulator that it will take to remedy past violations of the law and regulations. Oftentimes, if the registrant demonstrates that it takes its responsibilities under the law seriously by taking effective and timely action to remedy deficiencies, it can avoid enforcement action.