SEC Compliance Manual Violations Mean Enforcement Action for Investment Adviser

Manager Subject to Enforcement Action for Compliance Manual and Books and Records Violations

The SEC recently announced a settlement with a former federally registered Investment Adviser that will, among other things, bar the firm and its sole owner from the financial services industry for two years. Citing violations of the Investment Advisers Act, perhaps the SEC’s most impactful charge involved lack of compliance with Rule 206(4)-7, which requires a firm to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules.

Background

The respondent, Barthelemy Group LLC (“the firm”) and its sole owner and adviser Evens Barthelemy, was a SEC registered adviser from 2009-2011. Mr. Barthelemy formed the firm in 2009 after having worked as a registered representative for two broker-dealers since 2000. In 2011, the firm withdrew its SEC registration after the SEC found that it did not meet the multi-state exemption nor did it have the required amount of assets under management ($25 million at the time). Since then, the firm has been registered in New York and New Jersey.

Summary of Violations

Compliance Failures

The SEC found that the firm did not institute written policies and procedures in accordance with Adviser Act Rule 206(4)-7. That rule requires advisers to adopt written policies and procedures that are designed to prevent violation (by the principal and all supervised persons) of the Act and SEC rules related to it. The settlement order noted that Mr. Barthelemy prepared the firm’s compliance manual in 2010 but that he had “largely adopted it verbatim from a 2009 version he obtained from his prior employment at a registered broker-dealer”. Given that the broker-dealer did not engage in the advisory business, the SEC found that the firm’s compliance manual violated Rule 206(4)-7, noting that the manual referred to the Securities Act of 1933 and the Securities Exchange Act of 1934 but made no reference to the Advisers Act. In the same vein, the manual referred to duties of suitability and fairness but never mentioned the fiduciary duty that advisers owe their clients. The firm’s manual also referenced commission-based compensation and broker-dealer filings, none of which are relevant to comply with Rule 206(4)-7. Finally, the SEC found that the firm did not undertake an annual review of the adequacy of the compliance manual.

Books and Records Failures

The firm was found to be non-compliant with Rule 204-2(a) which requires advisers to make and keep true, accurate and current certain books and records relating to the advisory business. Specifically, the SEC stated that the firm did not have copies of the written acknowledgements of the firm’s code of ethics. Additionally, in connect with Rule 204-3 which requires delivery of a firm’s Form ADV to clients or prospective clients, the firm did not have records of such delivery also required by Rule 204-2(a).

Overstating Assets Under Management on Form ADV

The SEC found that the firm was not eligible for SEC registration under both the multi-state exemption or by meeting the minimum threshold test ($25 million at the time). The now rescinded multi-state exemption permitted those advisers subject to regulation by thirty or more states, to register with the SEC. However, the SEC found that the firm was subject to at most three states’ regulatory regimes. In addition, the SEC found that the firm managed nowhere near the $26.5 million it claimed, but rather the total was around $2.6 million. This misrepresentation violated Section 207 of the Act, which makes it unlawful for any person to willfully make untrue statements of material fact in a registration statement. In addition, this conduct violated Section 203A of the Act, which prohibits SEC registration as an adviser unless the firm meets a relevant exemption.

Penalties

Given the adviser’s inability to pay, no civil penalty was asserted. However, the following penalties were instituted:

  • The firm must furnish a copy of the SEC order to each existing client;
  • The firm must post a copy of the order on its website for a period of two years;
  • Certify evidence in writing of the steps taken to comply with all violations of the Act and its rules;
  • Mr. Barthelemy is barred from employment in the financial services industry for a period of two years; and
  • Mr. Barthelemy is censured.

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Cole-Frieman & Mallon LLP provides legal services to the investment management industry. The firm provides regulatory and compliance support and other legal services to hedge fund managers. The firm can be reached here and Bart Mallon can be reached directly at 415-868-5345.

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