Rule one following a regulatory examination is to implement the changes you told the regulators you said you would. GGHC failed to do so and it was the CCO’s fault. Then the CCO did the worst thing in compliance.
GGHC was duly registered as a broker-dealer and an investment adviser. It used both transaction based fees and annual fees for different accounts.
“As disclosed in its new account documents, GGHC “uses an aggressive growth style of investing . . . . [which] results in significant fluctuations and at times will result in significant losses in the short term.” GGHC also discloses that this type of investment style may involve active portfolio changes and therefore a high turnover, and as a result, the effective annual fee GGHC charges its advisory clients is often higher than the fees charged by comparable advisers. GGHC discloses commissions charged on each of its trades in trading confirmations provided to its clients, either as a separate line item or embedded in the price of the relevant security.”
Churn is a concern with the accounts using the transaction fee model. During a FINRA exam, the regulator wanted GGHC to beef up its review of cost-to-equity ratio and turnover ratios. GGHC agreed and amended its procedures to review cost-to-equity ratios monthly, document the reviews and escalate all accounts with a cost-to-equity ratio above 6%.
The firm amended its procedures but didn’t conduct the reviews. None of the accounts with cost-to-equity above 6% was escalated.
The SEC came in the following year for an examination. As you would expect, the SEC examiners focused on the cost-to-equity reviews. Rather than admit that she didn’t conduct the reviews, the CCO lied and produced doctored documents.
The exam resulted in a referral to enforcement. The CCO also sent doctored documents to the enforcement lawyers lying about the reviews. The CCO was finally subject to sworn testimony and admitted to altering the documents by whiting out the as of date and making later handwritten annotations.
Bad actions. Bad result for the firm and the CCO. The firm got hit with a $1.7 million fine and the CCO got barred.
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