Compliance Solutions for Investment Advisers

3 Ways to Reduce Potential SEC Penalties

One day you might find yourself in a situation where you have discovered – through the normal operation of your compliance policies and procedures or through your compliance testing – that your advisory firm has come up short in some significant manner. Depending on the severity of the problem (i.e., level of client harm) your firm may be facing penalties if the problem was discovered during an SEC audit. The best way to reduce any SEC penalty is to follow these three steps*:

  1. Self-Report
  2. Cooperate
  3. Remediate

As you can see from a recent SEC Administrative Action, the SEC takes a very positive view of such actions:

“The Commission has agreed to impose a reduced penalty that reflects the Respondents’ self-reporting of the improper fee payments, significant cooperation, and prompt remediation. For instance, upon discovery of some of the improper fees referenced herein, Respondents initiated an in-depth review of intermediary agreements and promptly self-reported their findings to the Commission staff. After self-reporting the improper fee payments, Respondents provided significant cooperation with the Commission’s investigation. Respondents’ efforts and cooperation assisted the Commission staff in efficiently investigating the conduct. Finally, after discovering the improper fee payments, Respondents promptly implemented enhanced policies and procedures regarding payments for distribution and sub-TA services, and informed the staff that they intend to reimburse affected shareholder accounts. (emphasis added)”

Of course, it is always advisable to first contact your firm’s legal representatives before reaching out to the regulators.

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