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Insight Analytical Note

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Standalone Compliance Rule Enforcement Action Caused by Recidivism

Background:

  • On September 12th 2023, the U.S. Securities and Exchange Commission (“SEC” or “Commission”) charged an adviser with violations of the Code of Ethics Rule and the Compliance Rule1.
  • Compliance Rule enforcement cases are rare and are usually pursued only in edge cases and in cases of recidivist behavior.
  • This manager was a recidivist, ignoring exam findings from 2006.

Key Facts and Allegations:

  • Recidivist Compliance Rule Violations – In 2006, during an examination by the SEC’s Division of Examinations, this adviser was issued a Deficiency Letter identifying the lack of written policies and procedures required under the Compliance Rule and the Code of Ethics Rule. In response, the manager provided the SEC staff with a Code of Ethics. However, in a subsequent examination in 2021, the manager did not implement any policies and appears to have removed the Code of Ethics.

Takeaways:

  • Implement Steps Promised in Response Letters – EXAM deficiency letters should be taken seriously. The Division of Examinations reviews response letters to previous examinations and any deficiencies noted by the SEC previously will be a part of future examinations. Any remediations identified in response letters to the SEC should be implemented.

1 Mortgage Industry Advisory Corporation; ADMINISTRATIVE PROCEEDING File No. 3-21646