Recently, the Securities and Exchange Commission (“SEC”) issued an Order Instituting Administrative Cease-and-Desist Proceedings against Ronald S. Rollins (“Rollins”) of Plainfield, New Jersey (Rel. 34-70058). Rollins is the former Chief Compliance Officer (“CCO”) of Comprehensive Capital Management, Inc. (“CCM”), a registered investment adviser firm. Some of the violations referred to in the Order include: Rollins’ failure to reasonably supervise, aiding and abetting, and failure to comply with CCM’s custody policy. For purposes of this blog posting, only the last violation will be discussed in greater detail.
Rule 206(4)-2 of the Investment Advisers Act of 1940 (the “Act”) requires advisers who have custody of client assets to implement a set of controls designed to protect those assets. In this context, “custody” means holding – directly or indirectly – client funds or securities, or having any authority to obtain possession of them, in connection with advisory services.
In this case, the SEC alleges that from 2003 to 2011, Timothy J. Roth (“Roth”), an employee under Rollins at CCM, stole approximately $16 million from clients of the firm by transferring client assets into a custodial broker-dealer account which he controlled. The fact that Roth had custody over these client assets was a direct violation of CCM’s written policies and procedures. The SEC alleges that Rollins failed to reasonably implement CCM’s custody policy, and as such, willfully aided and abetted Roth’s actions in this instance.
Even though Rollins was not forced to pay civil penalties due to his financial inability, he still received sanctions including a 12-month suspension for associating w/any industry professional, a 36-month bar from associating in a supervisory capacity for any industry professional, a 12-month prohibition from serving or acting as an employee of any industry professional, and a 12-month suspension from participating in any offering of a penny stock.
This case exemplifies that merely developing custody related policies and procedures designed to prevent the violation of regulations is not enough. Ongoing compliance efforts, such as keeping these policies and procedures current and ensuring that all employees have had a chance to review and understand these policies and procedures, are vital. All employees of a firm, especially firm supervisors, are responsible for adhering to the written policies and procedures of the firm, and in doing so, can help prevent abuses and misconduct like those of CCM.
For further information on this, or other related topics, please contact us at firstname.lastname@example.org or (619) 298-2880.