Three investment advisory firms have agreed to SEC sanctions for repeatedly ignoring problems with their compliance programs, the Securities and Exchange Commission announced today.
Modern Portfolio Management, an advisory firm in Holland, Ohio, and Equitas Capital Advisors and Equitas Partners, both based in New Orleans, have agreed to settlements in which they will pay financial penalties and hire compliance consultants, the SEC says.
The enforcement actions arise from the agencys Compliance Program Initiative, which targets firms that have been previously warned by SEC examiners about compliance deficiencies but failed to effectively act upon those warnings. The three cases are the latest brought by the SEC Enforcement Divisions Asset Management Unit in coordination with examiners since the initiative began two years ago.
The Compliance Program Initiative is designed to address repeated compliance failures that may lead to bigger problems, Andrew Ceresney, co-director of the SECs Division of Enforcement, said in a press release. That risk materialized with these firms, whose compliance programs were not adequate to prevent misleading statements in marketing materials or inadvertent overbilling of clients. Firms must not only have policies and procedures in place, but also need to properly implement those policies and procedures.
PROBLEMS NOT FIXED
Even after SEC examiners identified significant deficiencies, the three firms did little or nothing to address them by the next examination, according to Andrew Bowden, director of the SECs National Exam Program, also quoted in the announcement. Firms must fix deficiencies identified by our examiners.
Under what is known as the Compliance Rule -- Rule 206(4)-7 of the Investment Advisors Act -- investment advisors are required to adopt and implement written policies and procedures that are reasonably designed to prevent securities law violations. The rule requires advisors to review their policies and procedures at least once a year for adequacy and effectiveness of implementation. Advisors also must designate a chief compliance officer responsible for administering the policies and procedures.
Modern Portfolio Management and its owners, Tom Damasco and Bryan Ohm, failed to correct ongoing compliance violations at the firm despite prior warnings from SEC examiners, the agency says.
ASSET CLAIMS DISCREPANCY
In particular, they failed to complete annual compliance reviews in 2006 and 2009, and made misleading statements on MPMs website and investor brochure, according to the SEC. The firms website misleadingly represented that the firm had more than $600 million in assets, while its form ADV reported that it had $359 million or less in AUM, the SEC says.
MPM, Damasco, and Ohm agreed to be censured and pay a total of $175,000 in penalties. Damasco and Ohm must complete 30 hours of compliance training, and MPM has agreed to designate someone other than Damasco or Ohm to be its chief compliance officer. In addition, the firm must retain a compliance consultant for three years.
The firms website went dark on Wednesday afternoon, and the owners did not respond to a request for comment.
In New Orleans, Equitas Capital Advisors and Equitas Partners, as well as owner David Thomas Jr., chief compliance officer Susan Christina, and former owner and chief compliance officer Stephen Derby Gisclair, failed to adopt and implement written compliance policies and procedures and conduct annual compliance reviews to satisfy the Compliance Rule, the SEC charges.
Whats more, the Equitas firms made false and misleading disclosures about historical performance, compensation, and conflicts of interest, and inadvertently yet repeatedly overbilled and underbilled their clients, according to the SEC.
REPEATED WARNINGS
Many of these violations occurred despite warnings by SEC examiners during examinations of the Equitas firms in 2005, 2008, and 2011, according to the agency. The firms, Thomas, and Gisclair failed to disclose these deficiencies to potential clients in response to questions in certain due diligence questionnaires or requests for proposals, the SEC says.
Gisclair also caused Compliance Rule violations and the incorrect billing of clients at Crescent Capital Consulting, an investment advisory firm that he opened in late 2010, according to the SEC. Gisclair, a principal and senior investment management consultant at Crescent, inflated the amounts of assets managed by Equitas and Crescent in their Form ADV filings to the SEC, and improperly removed and retained nonpublic personal client information when he left Equitas, the agency says.
Equitas Capital Advisors and Crescent have reimbursed all overcharged clients, and Equitas Capital Advisors, Thomas, and Gisclair agreed to pay a total of $225,000 in additional penalties, according to the SEC. The Equitas firms have agreed to censures, the Equitas firms and Crescent have hired independent compliance consultants, and the Equitas firms and Gisclair must give clients notice of the SEC enforcement actions.
Thomas, Christina and Gisclair did not return calls for comment.
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