DISCLOSURE AND REDEMPTION: Attention to Compliance Details Not Optional

At a recent conference, I ran into a long-time mentor and friend, Marx Cazenave, the founder of Progress Investment Management, LLC (Progress).  He, among others, has coached me on life and the investment management business.  He also reminded me of the power of disclosure and redemption.  We are all a product of our experiences, both good and bad.  This conversation also led to some reflection on NexTier’s core values, one of which is Integrity: “We are committed to operating at the highest ethical standards with uncompromising honesty, transparency and selflessness toward our clients.”  What does this mean?

Consistent with that core value, here is my story and a source of my passion for protocol, process and accountability.  In 1996, I founded Trias Capital Management, LLC (Trias), as a fixed income advisor for institutional investors and ultimately grew it to nearly $2 billion in assets under management.  The firm was one the first of a breed of Emerging Managers.  In 1998, I acquired a money market mutual fund called Millennium Income Trust.  In 2003 as part of a routine exam, the SEC found me in technical violation of three different rules under the Investment Advisers Act and the Investment Company Act.  Importantly, no fraud was involved and no investor lost money, either principal or interest.

The first violation pertained to Millennium Income Trust where I failed to ensure that Trias repaid a receivable owed to the fund in a timely manner.  The receivable was less than $80,000.  The second violation related to the purchase by Trias of callable government agency securities that were ineligible under rule 2a-7 of the Investment Company Act.  The final violation stated that I failed to ensure that Trias kept accurate books and records stemming from carrying an investment in another investment management firm and the incorrect stating of a liability.  In essence, Trias was a small business without an appropriate investment in compliance resources prior to the dedicated chief compliance officer requirement.  We were an Emerging Manager that was not paying close enough attention to processes and procedures.  The resulting penalties by the SEC included a $25,000 civil penalty, a six month suspension from working with an investment advisor and a 12 month suspension from working with an investment company.  All three stipulations have long since been satisfied and I take sole responsibility for the actions of my firm and for the violations that were committed.

This ordeal is why I am adamant and have recommended to my clients, do not cut corners or operate on the cheap.  Compliance requires a level of rigor that cannot be compromised.  I want my clients to learn from my mistake, as I have learned from it.  Investment managers, especially Emerging Managers, must raise their level of operational efficiency to a place that is beyond reproach and adds value to their business.  Anything less will leave your firm vulnerable to regulatory action.  While difficult, this experience has made me a better investment management consultant.

Lesson learned: Attention to compliance is not optional, it is imperative.

James A, Casselberry, Jr.

Senior Managing Director

NexTier Companies, LLC