Former portfolio manager Carl Johns agreed to pay more than $350,000 to settle charges that he failed to comply with his firm’s code of ethics and misled the chief compliance officer (CCO), the SEC announced on Tuesday, Aug. 27. This is the first administrative proceeding under Rule 38a-1(c) of the 1940 Investment Company Act, which makes it unlawful to mislead or obstruct a firm’s CCO in the performance of his or her duties. The SEC adopted Rule 38a-1 in 2004 in order to increase compliance by investment fund managers with the securities laws.
Under Rule 38a-1, investment funds are required to 1) establish written compliance procedures; 2) obtain board approval of such policies; 3) review them annually; and 4) designate a CCO to administer them. The ethics code of Johns’s former employer required that transactions be precleared by the CCO and contained multiple restrictions on trading. The firm also required Johns to certify annually that he read and understood the ethics code.
The SEC alleged that from 2006 through 2010, Johns failed to report hundreds of transactions, in violation of his firm’s ethics policies, and falsely certified his annual compliance. Further, the SEC alleged he physically altered brokerage statements, trade confirmations and preclearance approvals that were sent to Advisers. When the company tried to investigate “irregularities” in these documents, Johns allegedly lied to the CCO to cover up his noncompliance.
Johns’ settlement, in which he neither admits nor denies any wrongdoing, bars him from the securities industry for five years, in addition to his paying $355,058 in disgorgement and penalties.
Said Julie Lutz, acting co-director of the SEC’s Denver Regional Office, “Securities industry professionals have an obligation to adhere to compliance policies, and they certainly must not interfere with the chief compliance officers who enforce those policies.”