Financial Planning’s Ann Marsh recently published an article detailing how a registered investment adviser’s chief operating officer allegedly stole $6 million from the firm and clients.  As often happens, the alleged thefts started small and gradually escalated over time, becoming more and more daring.  The COO allegedly first began by meddling with the firm’s payroll to increase his own pay.  When a client later raised questions about charges to his account with the CEO, the SEC’s complaint alleges that the CEO took the concern to the COO who “confessed to overbilling clients in order to personally profit himself.”

Although nothing in the report indicates that the CEO had any idea any of this was going on, there are some lessons.  Despite managing nearly half a billion dollars, the CEO held three different roles simultaneously:  CEO, Chief Compliance Officer, and Chief Investment Officer. When the same person occupies all three roles, it necessarily means that they cannot devote themselves entirely to any one role.  Although there is no guarantee that a full-time chief compliance officer or CEO would have caught this earlier, it’s hard to imagine that they would have stood a worse chance than someone overburdened with three simultaneous roles.

The precise moment where a growing firm should hire additional personnel will be a business decision.  I don’t know the right threshold for this.  But it does seem that the SEC might want to devote more examination and oversight resources to firms with concentrated roles and significant assets under management.