The SEC recently took action against Gainvest Legal Corp. and its owner. This action serves as a stark reminder for others in the financial services industry about the importance of a custom-tailored compliance program and how and by whom it is designed.
The SEC imposed a monetary penalty against Gainvest for several violations, including improper registration as an investment adviser, inadequate examination controls for client funds, and the failure to establish a proper compliance program as mandated by the Advisers Act.
The SEC particularly scrutinized Gainvest's compliance manual. Despite engaging a compliance consulting firm to draft its manual, Gainvest failed to ensure it was tailored to its specific business practices. The draft manual provided by the consulting firm was never edited by the firm, resulting in policies and procedures that did not address the firm's operations and associated risks.
These deficiencies contributed to lapses the SEC observed in Gainvest’s compliance program for a period of over three years, leading to its withdrawal as a registered investment adviser.
This case underscores the importance of tailored compliance policies and procedures in the financial services industry. Senior officials at the SEC have emphasized the agency's intolerance for firms that take shortcuts or do not allot adequate resources toward meeting their compliance obligations. Regulated firms must seriously consider their business model, practices, products, risks, and regulatory enforcement priorities when designing their compliance programs.
From our perspective, if you are engaging a compliance consultant, it’s your responsibility to be certain that the consulting firm understands your business and takes the time to have your policies and procedures reflect it. Not all consultants are created equally. If you conduct due diligence on the investments and products you recommend to clients, you should do the same when interviewing the consultant who will help keep your firm compliant.
