Compliance Program Rule, Rule 206(4)-7 | Custody | Form ADV

Owner of Formerly Registered Investment Adviser Settles with SEC Regarding Custody Rule, Compliance Rule, and Form ADV Violations

Jail_Cell-300x225By: Kathleen A. Olesinski, Senior Compliance Consultant

May 11, 2016

In a recent administrative proceeding, a fund manager’s principal, who also served as the Chief Compliance Officer, was barred from the industry and fined for failing to understand, and comply with, the Advisers Act’s Custody Rule (Rule 206(4)-2). The SEC found that The Planning Group of Scottsdale, LLC (“TPGS”), and its Principal/CCO, violated the Custody Rule by keeping certificates in lockboxes, and by having bank and brokerage accounts under the control of the Principal/CCO. The Principal/CCO also failed to engage a surprise third party audit.

Not surprisingly, the SEC also found the Principal/CCO to have “willfully aided and abetted TPGS’ violation of the Compliance Program Rule” (Rule 206(4)-7) by failing to update the firm’s custody policy and procedures since the Custody Rule was last updated in 2009.  The SEC also slammed the Principal/CCO for a violation of Section 207 of the Advisers Act because he did not update the firm’s Form ADV with appropriate disclosures required by the updated Custody Rule. The Principal/CCO was barred from the industry for at least one year, fined $45,000, and was required to complete 30 hours of compliance training before he could re-apply for admission.

This administrative proceeding not only demonstrates the importance of knowing your compliance obligations under the SEC Rules, but also serves as a reminder that registered investment advisers must retain a qualified and knowledgeable compliance professional to execute a comprehensive and reasonable compliance program. The SEC is not willing to settle for compliance programs that do not include all of the required elements of the compliance program, even for small advisers with limited staff.