The SEC recently settled an enforcement action against an investment advisor, Parallax Investments LLC, its owner and its Chief Compliance Officer, finding that metadata in the CCO's annual compliance memorandum contradicted the CCO's statement to the SEC staff about his compliance review.
Parallax was a registered investment advisor that provided advisory services to individuals, entities and a private fund, Parallax Capital Partners, focusing almost exclusively on mortgage-backed bonds and similar fixed-income securities. In its order approving the settlement, the SEC found that Parallax engaged in principal transactions with its clients without making the required disclosure, failed to comply with the audit requirements for advisors having custody of private fund assets, and failed to adopt and implement a Code of Ethics and written compliance procedures reasonably designed to prevent violations.
The SEC conducted an examination of the advisor in April 2011. During the exam, the CCO told the exam staff that in February 2011, he had performed and documented his annual compliance review for 2010, in accordance with SEC rules. The rules require an advisor to perform an annual review of the firm's compliance procedures and record and report any material compliance violations. The CCO also provided staff with his compliance memorandum for 2010, which stated: "This memo documents that I have performed [the annual] review and reported significant compliance events and Material Compliance Matters."
However, by reviewing the metadata for the compliance memorandum, the SEC determined that the compliance memorandum had not been drafted in February 2011, as the CCO represented. Rather, the metadata indicated that it was created and completed in approximately four hours in April 2011, just three days before the examination staff was scheduled to begin field work and after staff had notified Parallax of the impending exam.
Based on the foregoing, the SEC concluded that the firm failed to conduct the annual review of its compliance policies and procedures. The SEC also found that the CCO willfully aided and abetted several of the firm's violations and directed the CCO to complete thirty hours of compliance training.
This case serves as a useful reminder that firms and individual employees need to be accurate in communicating with regulators, and that the regulators have increasingly sophisticated tools at their disposal. Here, an ill-conceived statement in an examination in response to a preliminary request for information was shown to be incorrect and the SEC cited the contradiction as "evidence" in the subsequent disciplinary proceeding.
SEC Finds Metadata Contradicts CCO's Statement In Examination
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