Each year, the Securities and Exchange Commission Office of Compliance Inspections and examinations announces the most common compliance violations that registered investment advisers have struggled with. Violations involve a range of duties that advisers must uphold in order to remain compliant with SEC requirements. If found to be in violation of SEC requirements, investment advisers face serious civil penalties such as monetary penalties, interest payments, and the paying back of ill-gotten gains to return funds from investors that suffered harm due to the violation.
The most common violations include failure on the financial adviser’s part to uphold SEC requirements related to:
- The Compliance Rule: Advisers are required to adopt and follow policies and procedures that act as safeguards against securities law violations. They are required to have updated written policies, follow those policies, and annually review policies in order to provide investment advice to clients. When an adviser fails to do things like not updating compliance manuals or not conducting annual reviews, they are violating the compliance rule.
- Regulatory Filings: Advisers are required to accurately and timely file certain forms, such as Form ADV, annually. A common SEC violation is for advisors to fail to uphold this duty. Advisers in violation of regulatory filing requirements may have made inaccurate disclosures on forms or failed to timely file or amend forms.
- The Custody Rule: If an adviser has direct or indirect hold over client funds or has the ability to access funds, then the adviser is considered to have custody of clients’ funds. With custody comes certain responsibilities. It is all too common for advisers to be in violation of custody rules. For instance, an adviser may fail a surprise custody examination or may have failed to recognize that they had custody over certain client accounts.
- The Code of Ethics Rule: This SEC rule requires that advisers adopt and comply with a code of ethics. Violations of this rule commonly occur when things like advisers failing to make timely reports or failing to have a code of ethics description in Form ADVs.
- The Books and Records Rule: Advisers have a duty not only to maintain required records, but also to make sure the records are accurate and updated. It is all too common for advisers to comply with the books and records rule. Oftentimes advisers will fail to maintain the required records or fail to be consistent in record keeping, both of which constitute violations of SEC compliance violations.
It is unfortunate that the above constitute some of the most common SEC compliance violations. These violations can have a serious impact on the financial well being of a financial adviser’s clients. Your portfolio is sensitive to more than just market conditions. Sometimes misconduct on the part of a financial adviser can lead to significant investment losses. In these cases, you, as the client, have the ability to initiate securities arbitration in order to recover for the damages you have incurred as a result of your financial adviser’s misconduct. If you have incurred losses due to misconduct on the part of your financial adviser, you need to trusted legal counsel by your side. A knowledgeable securities lawyer can not only help answer your questions, but can help enforce your legal right to recoup the losses you have sustained as a result of financial adviser misconduct.