Remedial Effects, Cooperation with SEC Staffers Significantly Lighten the Sanctions.

[ by Howard Haykin ]

Foxhall Capital Management, a Middleburg, VA-based registered investment adviser ("RIA"), and its majority owner and current CEO, Paul Dietrich, agreed to settle SEC charges relating to numerous violations of the Advisors Act.  In large part, the violations stemmed from the failure to adopt and implement adequate written compliance policies and procedures. 

Profile of Respondents.   Foxhall Capital Management, Inc., HQ'd in Middleburg, VA, was founded in 1986 and has been registered with the Commission as an investment adviser since 1987. At that time it was known as Nye, Parnell and Emerson Capital Management, Inc. (“NPE”) .  Paul Dietrich purchased NPE in 1999, and shortly thereafter renamed the firm Foxhall Capital Management.  In its Form ADV, filed on 7/20/12 Foxhall reported having about $100 million in assets under management (AUM), approximately 1,600 client accounts, and 10 employees. In 2009, the end of the time period at issue, Foxhall reported $742 million in AUM, over 7,000 client accounts and 15 employees.

Paul Dietrich, 63, a resident of Upperville, VA, is the majority stock owner of Eton Court Asset Management, Ltd., the former majority owner of Foxhall, and is the current CEO of Foxhall.  During the time period covered by SEC examiners, - 2007, 2008 and most of 2009, Dietrich was the CEO and Co-CIO of Foxhall.  He also served as the Chief Compliance Officer (“CCO”) of Foxhall from January 2007 through October 2008 - breaking on or about April 2007.

Background Information.   The SEC promulgated Rule 206(4)-7 under the Advisers Act, that became effective 10/5/04.  That rule required RIAs to:

• adopt and implement written policies and procedures ("WSPs") reasonably designed to prevent violation of the Advisers Act and its rules;
• review the adequacy of the WSPs and the effectiveness of their implementation, at least annually;  and
• designate a CCO.

SEC Findings and Allegations.  The SEC conducted an examination of Foxhall Capital Management in 2009, covering the inclusive period from 1/1/07 through 9/3/09.  During that period, Foxhall offered its clients active investment portfolio management using several model portfolios designed to meet particular investment goals.  Foxhall’s clients chose particular model portfolios and delegated Foxhall with discretionary authority to manage their accounts. Foxhall typically would aggregate the buy and sell orders for clients into block trades that were sent to Foxhall's custodian for execution.  Foxhall would then provide the custodian with instructions for allocating the executed trades among the various customer accounts.

During the relevant time period, the number of Foxhall’s client accounts grew from about 1,000 accounts to over 7,000 accounts.  Assets under management ("AUM") likewise increased significantly, from about $300 million to over $742 million. 

The SEC examiners found Foxhall's policies, procedures and overall compliance program to be lacking in many areas. While the firm had written compliance policies and procedures ("WSPs"), SEC staffers found that they were not reasonably designed to prevent violations of the Advisers Act and its rules.  Specific failures and deficiencies included, the following: 

• Firm records were incomplete and inaccurate.

• Foxhall's overall compliance program was found to be deficient - and examiners alerted Foxhall to these deficiencies;  examples included:

♦  Failure to follow the stated policies and procedures written in its compliance manual;

♦  Failure to maintain adequate records of its trading; and,

♦  Failure to timely conduct the required 2007 annual compliance review.

• SEC field examiners referred the findings of their 2009 exam to enforcement for further investigation.  Enforcement staffers, in turn, determined that Foxhall continued to operate without correcting the noted deficiencies. 

• As it turned out, Foxhall’s trade management system did not interface properly with (i.e., was not compatible with) its primary broker-dealer and custodian’s (“custodian’s”) trading platform -creating real-time trade reconciliation issues.  Specifically:

♦  Foxhall's client account balance records were not always up-to-date.

♦  This led Foxhall to allocate shares to certain client accounts that did not have sufficient funds to purchase their allocations.

♦  However, the was a time lag of 3 to 5 days after the original block trade date before Foxhall learned about the unallocated shares. 

♦  At that point, the custodian alerted Foxhall and asked for guidance as to how to allocate the remaining shares.

♦  Foxhall's unwritten practice was to reallocate these shares to other clients who were within the same investment model portfolio, so long as they had sufficient excess cash in the account.

♦  At other times, Foxhall would allocate these shares to new clients to bring their portfolios in line with their investment model strategy. 

♦  Foxhall, however, did so without regard to whether the share price increased or decreased from the date of the original trade.

♦  Shares that Foxhall could not allocate to other customers ultimately were sold through Foxhall's proprietary account.

♦  Foxhall further confounded the issue by not maintaining complete and accurate records concerning its reallocation process.  Neither Foxhall’s trade allocation spreadsheet, nor its trading records contained complete records of these trade reallocations. No formal records of these trade reallocations were kept or maintained.

♦  Not surprisingly, Foxhall failed to conduct a timely annual review of Foxhall’s 2007 compliance policies and procedures.

Remedial Steps.    Dietrich, as Foxhall's CEO, Co-CIO, and CCO, first became aware of the trade reconciliation issues on or about July 2007.  However, while he was aware of the  issues,  and was aware that traders were taking steps to address these issues, he was not aware of the details of the practice followed by the traders to handle the issues.  Ultimately, Foxhall switched to a new custodian in August 2008.  In June 2009, Foxhall replaced its trading platform.  By September 2009, Foxhall’s trade reconciliation issues were effectively eliminated.

Dietrich also hired a compliance consultant to perform the 2007 and 2008 annual compliance reviews and to evaluate and give guidance regarding Foxhall's compliance practices and procedures. Foxhall currently has a 3rd party compliance consultant who serves as its CCO. Foxhall also hired an independent accountant to analyze the impact of Foxhall’s reallocation process on its clients.

Noted Violations.   As a result of the conduct described above, Foxhall willfully violated Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder, which requires, among other things, that an RIA:  (i) implement WSPs reasonably designed to prevent violations of the Advisers Act and its rules;  and, (ii) review at least annually its WSPs and the effectiveness of their implementation.

As a result of the conduct described above, Foxhall willfully violated Section 204 of the Advisers Act and Rule 204-2(a)(3) thereunder which requires, among other things, that an RIA make and keep true, accurate and current records relating to its business including a memorandum of each order given by the investment adviser for the purchase or sale of any security; of any instruction received by the investment adviser from the client concerning the purchase, sale, receipt or delivery of any particular security, and of any modification or cancellation of any such order or instruction.

As a result of the conduct described above, Dietrich, in his roles as CEO, CCO and Co-CIO, willfully aided and abetted and caused Foxhall’s violations of Sections 204 and 206(4) of the Advisers Act and Rules 204-2(a)(3) and 206(4)-7 thereunder.

SEC Sanctions.   Notwithstanding the willful nature of the violations, the SEC took into account the remedial acts that Foxhall promptly undertook, as well as its cooperation with the SEC staff.  its trading platform in 2009.  Accordingly, the severity of the sanctions were minimized, as follows:

• Foxhall agreed to pay $22.3K in disgorgement and prejudgment interest, and a penalty of $100K. 
• Dietrich agreed to pay a $25K civil penalty.

For further details, go to:   [ SEC IA ACT OF 1940 Release No. 3590, 4/19/13 ].

To contact the writer:  Howard@Compliance-Insights.com