On November 6, 2018, the U.S. Securities and Exchange Commission (“SEC”) brought an enforcement action against a (formerly) registered investment adviser (“Adviser”), for failing to meet its diligence and compliance responsibilities under the Investment Advisers Act (“IAA”) relating to certain repurchase agreement (“repos”) facilities it offered to its clients.

The Adviser offered nine repo facilities involving loans guaranteed by various government entities.  Under an agreement with First Farmers Financial (“FFF”), FFF purportedly pledged loans guaranteed by the U.S. Department of Agriculture (“USDA”) as collateral for the repo.  However, the loans turned out to be fraudulent, and FFF and its corporate officers exhibited a number of red flags along the way, including providing falsified financial statements from a fake auditor.

The SEC found that the Adviser violated various provisions of the IAA and its rules by harming its advisory clients, which included a registered investment company, in two primary ways.  First, the SEC found that Adviser failed to pursue the truth about FFF’s repos in the wake of missing audited financial statements and warnings by Adviser employees and a private investigator.  And second, Adviser failed to adequately resource its compliance department and did not have or follow compliance policies and procedures that could have prevented the FFF issues in the first place.

Under the SEC’s enforcement order, Adviser must pay a civil monetary penalty of $400,000.  The SEC’s enforcement order against Adviser can be found here.

Good Day. DR2.