The role of the Chief Compliance Officer ("CCO") is to ensure that a firm complies with its outside regulatory requirements and internal policies. This requires the CCO to administer, test and supervise the policies and procedures (P&Ps) of a firm that are reasonably designed to prevent violation of Federal Securities Laws. CCOs are often the first to be blamed when violations occur, and there have been several documented instances that illustrate how a CCO's failure to properly supervise can lead to sanctions by the Securities and Exchange Commission ("SEC") (for such an example please see JLG's blog posting dated August 8, 2013). More recently, however, the SEC sanctioned former portfolio manager Carl Johns ("Mr. Johns") at Boulder Investment Advisers ("BIA"), a Colorado-based investment adviser, for forging documents and misleading the firm's CCO (who was not named in the SEC's Release) in order to conceal his failure to report personal trades, thus violating Rule 38a-1(c) of the Investment Company Act. This violation was discovered by the CCO herself, thanks to BIA's well-drafted P&Ps and to the CCO's admirable supervision of those P&Ps.
The SEC alleged that Mr. Johns failed to pre-clear several hundred securities trades in his personal accounts, as is required under Rule 17j-1 of the Investment Company Act of 1940, and as specified in BIA's code of ethics. Mr. Johns even went so far as to create false documents purporting pre-trade approvals, in an attempt to mislead the CCO in her investigation into Mr. John's improper trading. According to the SEC, the CCO identified irregularities in the documents that Mr. Johns submitted, and these irregularities prompted the CCO to make inquiries about Mr. Johns' compliance with the code of ethics contained in BIA's P&Ps. The CCO's efforts eventually lead to the discovery of Mr. Johns' improprieties, at which point BIA self-reported the case to the SEC. Mr. Johns settled the charges with the SEC, agreeing to pay disgorgement of $231,169, prejudgment interest of $23,889, and a penalty of $100,000. Additionally, Mr. Johns consented to a five (5) year bar from the industry.
This case exemplifies the importance of drafting P&Ps that are customized and effective in preventing violations of Federal Securities Laws. Of even greater import, however, is how the case showcases the key role that a CCO plays within a firm, and how proper supervision and due diligence can help identify unlawful activity, sparing the CCO and the firm from possible sanctions down the road.
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