Recently announced cases against two registered investment advisers and certain of their executives serve as timely reminders of where the SEC is focusing its attention. Although the SEC’s actions are based on alleged intentional violations or disregard of certain regulations, they impart important lessons for law-abiding registered investment advisers. Advisers should be aware of the SEC’s focus areas as they prepare for the annual review of their compliance programs required by Rule 206(4)-7 under the Investment Advisers Act.

The cases involve two investment advisers and certain of their executives who allegedly engaged in thousands of principal transactions through an affiliated brokerage firm without informing their clients. One of the firms and its CCO were also charged with violations of the custody rule and failure to adopt a compliance program reasonably designed to ensure compliance with the federal securities laws, as required by Rule 206(4)-7.

Executives at the two advisory firms collectively owned a brokerage firm through which the advisers initiated and executed principal trades without making the required disclosures to their clients or obtaining the clients’ prior consent. The executives were paid a total of more than $2 million in connection with the offending trades.

The SEC has been clear that it is focused on investment advisers’ compliance with their regulatory obligations, particularly in these areas:

  • conflicts of interest;
  • principal transactions;
  • the custody rule; and
  • the need to adopt and maintain compliance programs designed to prevent violations of the federal securities laws.

These two actions are particularly timely examples of the SEC staff putting its money where its mouth is. As we approach the end of the year, many registered investment advisers will start to plan for the annual review of their compliance programs required under Rule 206(4)-7. Advisers should consider consulting experienced counsel to ensure that such programs are appropriately drafted and maintained in light of their particular business and the SEC’s focus areas.