In one recent case, regulators charged an RIA's president, vice president and chief compliance officer. The firm is no longer in business.
It's an understatement to say that overstating assets under management will get registered investment advisers into trouble with securities regulators. In three separate enforcement actions brought against a dissolved RIA's president, chief compliance officer and vice president, the Securities and Exchange Commission charged that the parties overstated their firm's AUM.
The SEC alleged that the RIA materially misstated its AUM on two occasions. In November 2011, the RIA misstated in filings that it had $32 million in AUM when the actual amount was less than $20 million. In its March 2012 Form ADV, the RIA represented that it had $190 million in AUM. In fact, it had less than $80 million in AUM. Because of these misstatements, the RIA was improperly registered with the SEC.
The president of the RIA was aware that the AUM figures in the March 2012 Form ADV were materially misstated. He did not have a reasonable basis for believing that the firm's AUM was anywhere near $190 million. The president knew, or should have known, that his conduct would contribute to the RIA's filing a materially false or misleading report.
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On Oct. 1, 2012, the SEC notified the RIA that it would be examining the firm. Following inquiries from the Office of Compliance Inspections and Examinations, the RIA filed a Form ADV amendment on Nov. 28, 2012, which stated that the firm's current AUM were slightly more than $46 million.
NO BOOKS AND RECORDS
When preparing and submitting the Form ADV, the CCO relied on phone conversations and did not have books and records to support the firm's AUM declarations. She did not obtain a list of advisory accounts nor the account data required to calculate AUM.
Along with its AUM misstatements, the RIA did not adopt or implement policies and procedures that were reasonably designed to prevent violations of the securities laws. Boilerplate policies and procedures will cause examiners' blood to boil. The RIA used a compliance manual obtained from an employee's previous firm. It was not customized to the firm's advisory business.
In addition, members of the firm were unfamiliar with the policies and procedures contained in the compliance manual. Furthermore, many of the policies and procedures in the manual were never implemented.
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The RIA withdrew its SEC registration on July 7, 2013, and registered in several states. By the end of 2014, the RIA had withdrawn all of its state registrations and no longer operated an advisory business.
The president, CCO and vice president were all required to complete 30 hours of compliance training within six months of the order. In addition, the president was fined $25,000. The CCO and vice president were ordered to pay fines of $10,000 each.
LOOKING LARGER
On too many occasions, RIAs overstate their AUM in order to look larger and more successful than they actually are. They believe the old expression that money comes to money and fear high-net-worth clients won't hire a smaller firm.
There is one fact that is hard to dispute. Prospective clients, high net worth or not, are far less likely to hire an RIA that has been disciplined by the SEC or a state securities regulator.
Les Abromovitz is a senior consultant with National Compliance Services and the author of two books on compliance for investment advisers.
