The SEC charged Consulting Services Group, LLC (CSG), a Memphis, Tennessee-based registered investment adviser, with failing to adopt a compliant investment adviser code of ethics by February 1, 2005, in violation of Section 204 of the Investment Advisers Act of 1940 ("Advisers Act") and Rule 204A-1. The SEC further found that Joe D. Meals (Meals), CSG's chief compliance officer, instructed CSG's supervised persons to backdate the written acknowledgment forms required under Advisers Act Rule 204A-1 so as to indicate falsely that CSG had timely complied with the ethics code provisions of Advisers Act Rule 204A-1. In June of 2005, the SEC staff requested that CSG provide to the SEC staff the written acknowledgment forms executed by CSG's supervised persons. In response to the SEC staff's request, Meals again instructed certain CSG supervised persons to backdate their written acknowledgment forms, CSG then produced all such backdated written acknowledgment forms to the SEC staff.
The SEC found that by failing to adopt timely a code of ethics compliant with Rule 204A-1 and by failing to maintain accurate written acknowledgments by all supervised persons of their receipt of a code of ethics compliant with Rule 204A-1, CSG willfully violated Advisers Act Section 204 and Rule 204-2 thereunder and Rule 204A-1 and Meals willfully aided and abetted and caused such violations.
The SEC further found that CSG failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the Rules thereunder by its supervised persons, in violation of Advisers Act Section 206(4) and Rule 206(4)-7 thereunder. In adopting Rule 206(4)-7, the SEC described a flexible approach that could be taken by investment advisers, stressing that there was no single set of universally applicable required elements for an investment adviser's policies and procedures, and that instead each adviser should adopt policies and procedures that take into consideration the nature of that firm's operations. The SEC further stated that firms should first identify conflicts and other compliance factors creating risk exposure for the firm and its clients in light of the firm's particular operations, and then design policies and procedures that address those risks. See Compliance Programs of Investment Companies and Investment Advisers, Advisers Act Release No. 2204 (December 24, 2003).
The SEC further found that in September 2003, in an effort to comply with Advisers Act Rule 206(4)-7, Meals purchased for CSG an Investment Advisers Policies and Procedures Manual template from a compliance outsourcing firm. Meals combined the 2003 policies and procedures template with a similar set of pre-packaged policies and procedures from 1990 to serve as CSG's written policies and procedures. The pre-packaged policies and procedures manual and template that Meals purchased for CSG in 1990 and 2003 was, however, designed for use by investment advisers offering discretionary money management services to clients - and was not designed for use by institutional or pension consultants. The pre-packaged policies and procedures manual and template failed to address adequately the conflicts of interest unique to CSG's operations as a pension consultant, and many of the sections within these generic forms were completely inapplicable and irrelevant to CSG's provision of advisory services to clients. The SEC found therefore that by failing to adopt and implement written policies and procedures reasonably designed to prevent violation of the Advisers Act and the rules thereunder by its supervised persons, CSG willfully violated Advisers Act Section 206(4) and Rule 206(4)-7 thereunder and according to the SEC, Meals willfully aided and abetted and caused such violations. The SEC censured CSG and Meals; ordered that CSG and Meals cease and desist from committing or causing any violations and any future violations of Sections 204 and 206(4) of the Advisers Act and Rule 204-2(a)(12), 204A-1(a)(5) and 206(4)-7 thereunder; ordered CSG to pay a $20,000 civil monetary penalty; ordered Meals to pay a $10,000 civil monetary penalty; and barred Meals from association in a compliance capacity with any broker, dealer or investment adviser.
Please click http://www.sec.gov/litigation/admin/2007/34-56612.pdf for a copy of the administrative order.