SEC Sanctions Three Firms Under Compliance Program Initiative
The Securities and Exchange Commission today sanctioned three investment advisory firms for repeatedly ignoring problems with their compliance programs.
The enforcement actions arise from the agency’s 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. Had the problems been addressed, the firms could have prevented their eventual securities law violations. The SEC Enforcement Division’s Asset Management Unit has coordinated with examiners to bring several cases since the initiative began two years ago.
The firms charged today – Modern Portfolio Management Inc., Equitas Capital Advisers LLC, and Equitas Partners LLC – have agreed to settlements in which they will pay financial penalties and hire compliance consultants.
“The Compliance Program Initiative is designed to address repeated compliance failures that may lead to bigger problems,” said Andrew J. Ceresney, co-director of the SEC’s Division of Enforcement. “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.”
Andrew Bowden, director of the SEC’s National Exam Program, added, “After SEC examiners identified significant deficiencies, these firms did little or nothing to address them by the next examination. Firms must fix deficiencies identified by our examiners.”
Under what is known as the “Compliance Rule” (Rule 206(4)-7 of the Investment Advisers Act), investment advisers are required to adopt and implement written policies and procedures that are reasonably designed to prevent securities law violations. The rule requires advisers to review their policies and procedures at least once a year for adequacy and effectiveness of implementation. Advisers also must designate a chief compliance officer responsible for administering the policies and procedures.
The SEC’s order against Modern Portfolio Management (MPM) and its owners G. Thomas Damasco II and Bryan Ohm finds that they failed to correct ongoing compliance violations at the firm despite prior warnings from SEC examiners. In particular, they failed to complete annual compliance reviews in 2006 and 2009 and made misleading statements on MPM’s website and investor brochure. For instance, one location on MPM’s website misleadingly represented that the firm had more than $600 million in assets. However, on its Form ADV filing to the SEC during that same time period, it reported that the firm’s assets under management were $359 million or less.
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. MPM, which is based in Holland, Ohio, must retain a compliance consultant for three years.
According to the SEC’s orders against New Orleans-based Equitas Capital Advisers and Equitas Partners as well as owner David S. Thomas, Jr., chief compliance officer Susan Christina, and former owner and chief compliance officer Stephen Derby Gisclair, they failed to adopt and implement written compliance policies and procedures and conduct annual compliance reviews to satisfy the Compliance Rule. The Equitas firms made false and misleading disclosures about historical performance, compensation, and conflicts of interest, and they inadvertently yet repeatedly overbilled and underbilled their clients. Many of these violations occurred despite warnings by SEC examiners during examinations of the Equitas firms in 2005, 2008, and 2011. 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. Gisclair also caused Compliance Rule violations and the incorrect billing of clients at Crescent Capital Consulting LLC, an investment advisory firm that he opened in late 2010. Gisclair inflated the amounts of assets managed by Equitas and Crescent in their Form ADV filings to the SEC, and he improperly removed and retained nonpublic personal client information when he left Equitas.
Equitas Capital Advisers and Crescent have reimbursed all overcharged clients, and Equitas Capital Advisers, Thomas, and Gisclair agreed to pay a total of $225,000 in additional penalties. 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.
The SEC’s investigation into the Equitas firms was conducted by David Neuman of the Asset Management Unit and Virginia Rosado Desilets, and was supervised by Jeffrey Finnell of the Asset Management Unit. Examinations of the firms were conducted by Conston Casey, David Marsh, Kenny Clowers, and Mavis Kelly. The SEC’s investigation of Modern Portfolio Management was conducted by Amy Flaherty Hartman and Jamie Davidson following examinations of the firm by Michael Esposito, Sarah Kuhn, Arthur Stoll, Louis Gracia, Steven Levine, Kiley Hamilton, Belinda Hoskins, and Maureen Dempsey of the Chicago Regional Office.