I don’t like compliance officers being dragged into enforcement actions. If they are involved in the wrongdoing or are just a wholesale failure at compliance, I understand why.
Elliot Daniloff a/k/a Ilya Olegovich Danilov was the chief compliance officer of ED Capital Management, LLC, and its managing member and owner. The firm was a registered investment adviser. The parties consented to the SEC Order,
According to the SEC’s order, from fiscal years 2012 through 2016, the firm failed to distribute annual audited financial statements prepared in accordance with Generally Accepted Accounting Principles, to the investors in the largest private fund that it advised. Without the audited financial statements, the firm was repeatedly violating the Custody Rule.
It’s not that the firm didn’t try. It had engaged a PCAOB-registered firm for a few years to conduct an audit. The auditor couldn’t complete the audit and stated that it was “not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion” and therefore did “not express an opinion” on whether the fund’s financial statements were prepared in accordance with GAAP. A disclaimer of opinion does not constitute the performance of an audit in accordance with Generally Accepted Auditing Standards and therefore doesn’t meet the compliance obligations of the Custody Rule.
The firm didn’t want to flag that deficiency in its Form ADV by failing to check the box that it sent out audited financial statements. The SEC’s order finds that Daniloff, on behalf of ED Capital, signed and filed annual Forms ADV that falsely stated that ED Capital did distribute audited financial statements to the fund’s investors.
The SEC’s order also finds that ED Capital failed to have written policies and procedures reasonably designed to prevent violations and failed to conduct the requisite annual reviews of its written policies and procedures. It’s not clear if it had any.
The mention to Daniloff as CCO is in part because he was also the firm’s principal and wearing more than one hat. It seems like he should have given the CCO hat to someone else.
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