ALTERED RECORDS, LACK OF PROCEDURES YIELDS SANCTIONS
Altering compliance records prior to their production for an examination and inadequate procedures to control the flow of nonpublic information became the predicate for sanctions against a broker dealer, an investment adviser and the chief compliance officer of both. In the Matter of The Buckingham Research Group, Adm. Proc. File No. 3-14125 (Filed Nov. 17, 2010). The Respondents in this proceeding are: Buckingham Research Group, Inc., a registered broker-dealer and institutional equity research firm; Buckingham Capital Management, Inc., a registered investment adviser which is a wholly owned subsidiary of Buckingham Research; and Lloyd Karp, the chief compliance officer of both entities in which he has a small equity interest.
The two firms have a close working relationship. They share space, have common officers and about 25% of Buckingham Research’s commission revenue comes from trades by Buckingham Capital.
Both firms failed to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information according to the Order for Proceedings. Buckingham Research created a policy regarding the use of material research information designed to document compliance with the firm’s confidentiality policy and to make sure that analysts were aware of their responsibility to restrict the disclosure of such information. The policy was not followed, according to the Order.
In contrast, prior to February 2007 Buckingham Capital did not have a written policy to address the potential misuse of Buckingham Research’s material research information. While the firm did adopt certain practices designed to prevent misuse, they were not consistently followed.
Buckingham Capital did have policies regarding material non-public information. They were not followed. The firm also had a written Insider Trading Prohibitions policy which required that persons with access to inside information report all relationships that may result in access to such information. It was not followed.
In 2005 Mr. Karp created a compliance review log form to ensure that compliance reviews were conducted by the investment adviser. The purpose was to prevent violations of the anti-fraud provisions. There were no written procedures that adequately set forth the use of the log. Thus personnel had no uniform understanding of its use.
The firm and Mr. Karp also failed to implement remedial steps in response to deficiencies identified by the SEC exam staff despite a written representation that each item would be adequately addressed. Indeed, although Mr. Karp was aware of the compliance weaknesses and failures, he did not require correction.
Finally, as Buckingham Capital prepared for its 2006 examination, the firm learned that it was missing pre-approval forms for more than 100 employee trades during 2005. The firm also discovered that its compliance review logs were incomplete. Rather than producing the incomplete records, the firm created the missing documents and furnished them to the staff without disclosing what they had done.
The Order concludes that Buckingham Research willfully violated Exchange Act Section 15(f) and Buckingham Capital willfully violated Advisers Act Section 204A. These Sections essentially require that brokers and dealers in the case of Section 15(f) and investment advisers in the case of Section 204A establish and maintain written policies and procedures to prevent the misuse of material nonpublic information.
The Order also finds that Buckingham Capital violated: 1) Advisers Act Section 206(4), which prohibits fraud and deceptive acts, and Rule 206(4)-7, which requires the adoption of written procedures to implement the provision, by failing to adopt adequate procedures with respect to the use of the compliance log; 2) Rule 206(4)-7(b) under Section 206(4), which requires that an annual compliance review be conducted, by failing to have a review in 2005; and 3) Advisers Act Section 204(a), which provides that all records are subject to examination by the Commission, by not producing records as they existed and creating others without informing the staff.
To resolve the action, each defendant consenting to the entry of a cease and desist order from committing or causing any violations and any future violations of: with respect to Buckingham Research, Section 15(f) of the Exchange Act; with respect to Buckingham Capital, Advisers Act Sections 204(a), 204A and 206(4) along with the pertinent rules; and Mr. Karp from causing any violations of these Sections. The two firms were also ordered to comply with their undertakings which include retaining a consultant with respect to their procedures and essentially adopting the recommendations for improvement. Each Respondent also agreed to pay a civil penalty as follows: Buckingham Research: $50,000; Buckingham Capital, $75,000; and Mr. Karp, $35,000.