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I don't take pleasure from others' failings, but I do try
to learn lessons. The recent settlement between Wunderlich Securities and the
Securities and Exchange Commission is full of lessons to be learned.
It seems some of the failings, at least according to the
order was that Wunderlich hired a CCO with a background in Broker-dealer
compliance, but at the same time, the firm moved from a broker-dealer model to
an investment adviser model. That left the CCO in a new regulatory scheme.
Under Section 206(3) of the
Advisers Act, an investment adviser must disclose to its clients in writing
before the completion of each transaction that it acts as a principal.
Wunderlich failed to follow this rule in over 3,000 instances according to the
order. The issue is that the investment adviser can both collect a fee and
realize a difference between its cost of the security and the price it's sold
to the the client. That difference in price is a conflict that needs to be managed.
Wunderlich even hired a consultant to to review their operations who
highlighted the principal trading problem. That still did not lead to a
Wunderlich failed to have written compliance policies or
a written code of ethics. That leads to the follow up failure of an annual
review of the written compliance policies and procedures. Its hard to update
something that is not in place. Wunderlich was using its broker-dealer manual
and failed to update it to meet the requirements under the Investment Advisers
Act. Once again, this failure was highlighted in a consultant's report and the
firm failed to fix the problem.
A long true lesson in compliance is when a problem is
highlighted, you need to fix it. The spotlight is on the problem.
additional commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.
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