SEC Fines Firm for Not Inspecting Advisors

The Commission’s Division of Examinations commenced an exam of JZAI in January 2022.

During the exam, JZAI made the exam staff “aware that it had recently identified potentially fraudulent conduct involving one of its relying advisers,” the order states.

Ultimately, the Division of Examinations identified certain deficiencies in JZAI’s compliance program.

“While JZAI collected annual certifications from supervised persons attesting that they had received, read, and understood the firm’s compliance policies, JZAI did not conduct any compliance training or training on its Code of Ethics for its supervised persons during the Relevant Period, including for its supervised persons employed at the relying advisers,” the order states.

While JZAI compliance personnel reviewed various records and correspondence in the ordinary course of business, “JZAI did not conduct spot-checks of books and records of JZAI or its relying advisers,” the order continues.

JZAI was also required to “conduct periodic inspections of each Adviser’s principal place of business” to confirm that no adviser was engaging in prohibited practices, such as “knowingly employ[ing] any device, scheme or artifice to defraud a client, or engag[ing] in any act, practice, course of business which operates or would operate as a fraud or deceit upon such person.”

However, “JZAI did not conduct any inspections of the offices of JZAI or its relying advisers,” according to the SEC.

In August 2022, in response to the exam, JZAI took steps to remediate these deficiencies, including by engaging an independent compliance consultant to conduct ongoing email monitoring and provide periodic employee compliance trainings. JZAI also hired an additional person to join its compliance team.