IA Sanctioned Based On Risk Areas In OCIE Alert

The Commission’s inspection staff – OCIE – issued an Alert about its national inspection program earlier this week, highlighting risk areas for investment advisers. Any adviser facing an inspection would do well to review the alert (here). That point is underscored by the SEC’s most recent enforcement action involving an investment adviser. It is based on items such as the Code of Ethics and required books and records that are discussed in the OCIE Alert. In the Matter of Jeffrey Slocum & Associates, Adm. Proc. File No. 3-17833 (Feb. 8, 2017).

Jeffrey Slocum & Associates was a registered investment adviser that provided consulting services to institutional investors. Its president and majority shareholder is Respondent Jeffrey Slocum. The Order centers on two key points.

First, over a period of about three years, beginning in June 2011, the firm disseminated marketing materials to prospective clients that made representations regarding its ethical approach to doing business and avoiding conflicts. Specifically, the materials informed prospective clients that the firm does not accept anything of value from investment managers as a guard against potential conflicts. Those representations varied from the provisions of the firm’s Code of Ethics. That Code permitted firm employees to accept gifts with a value of $100 or less. If the value was above that threshold then the employee could obtain pre-approval from either the COO or the GC.

The representations also varied from practice. In 2012 two employees accepted tickets to the Masters Golf Tournament from an investment manager after obtaining pre-approval. Four others also accepted the tickets, valued at over $100, without obtaining preapproval. When the firm learned this fact the COO and GC were prepared to require reimbursement by the employees. Mr. Slocum intervened and permitted the employees to keep the tickets.

Second, the firm disseminated misleading advertising materials, in part because its compliance procedures were inadequate as were the firm’s books and records. The materials, developed in 2013 by firm employees, were designed to demonstrate the “value added” for clients by the firm. The materials, however, were not based on actual results. To the contrary, they were based on hypothetical results and back testing. Subsequently, for some versions of the materials, a footnote was added stating these facts. Most of the materials did not contain the footnote.

The materials were not based on actual results because the firm’s books and records were not adequate to capture the necessary data. Likewise, the firm did not have compliance procedures regarding the review of marketing materials or the use of performance data in marketing materials. The Order alleges violations of Advisers Act Sections 204(a), 206(2) and 206(4).

To resolve the proceeding the adviser consented to the entry of a cease and desist order based on each of the Sections cited in the order and a censure. The firm will also pay a penalty of $300,000. Mr. Slocum consented to the entry of a cease and desist order based on Sections 206(2) and 206(4). In addition, he will pay a penalty of $100,000.

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