Firm Principal Fined by the SEC for Supervisory Violations

Recently, the U.S. Securities and Exchange Commission charged a California-based adviser with several compliance failures related to supervisory and disclosure practices. The violations occurred when the Principal of an investment advisory firm did not properly supervise an inexperienced investment advisory representative who allowed his father, a person not affiliated with the firm, to impersonate him on phone calls, access client information, and led clients to believe his father was associated with the firm.

The recently licensed representative was supervised by the firm’s Principal, who was responsible for overseeing his client communications, trading, and other activities. At the same time the representative was onboarded, his father, a former representative of another firm, sought to join the new firm. However, the Principal was not willing to associate with the father because he was involved in an ongoing FINRA investigation and was barred from using the trading platform of the clearing broker engaged by the firm.

Over the following months, the father shared an office space with the son and provided investment advice to clients who followed him from his previous firm. The father was never formally affiliated with the firm, but the Principal was aware of the behavior and even corresponded directly with the father about confidential firm business.

During this time, a new Chief Compliance Officer was hired and expressed concern to the Principal over the father’s involvement with the firm’s clients serviced by the son, but no action was taken. Not long after, the firm’s clearing broker informed the Principal that the father had impersonated his son during phone calls on nearly 40 occasions. The clearing broker provided recordings of the father identifying himself as his son and discussing confidential client information with the service provider. Upon learning of the misconduct, the CCO recommended the termination of the son, but the Principal did not do so and established a new supervision agreement instead.

When the SEC was made aware of the failures, commission staff acted to charge the firm and its Principal with a variety of compliance violations. Most prominently, the Principal’s failure to properly supervise his employee resulted in deceit and fraud when clients were not made aware the employee’s arrangement with his father. The Principal’s failure to mitigate any potential harm done to clients was in violation of the Advisers Act and resulted in enforcement action by the SEC.

As a penalty, the SEC censured the firm; ordered the Principal to complete mandatory compliance training, barred him from acting in a supervisory capacity, and fined him $20,000. Fortunately for clients, no material fiscal harm was done, despite the misconduct.