As hedge fund trading becomes more complex and reliant on technology, it is incumbent upon investment advisers and broker-dealers to ensure that their compliance systems are able to adequately and accurately monitor such technology and trading. The SEC recently settled an enforcement action with a registered investment adviser and broker-dealer arising from compliance and surveillance failures involving technological errors that, in some cases, remained undetected for years. As a result of these failures, the entity in question violated provisions of the federal securities laws relating to trade surveillance and its policies and procedures regarding principal transactions. This article summarizes the SEC order against, and settlement with, the investment adviser and broker-dealer, including the violations alleged in, as well as the lessons to be learned from, the action. For another recent SEC enforcement action relating to inaccurate reports resulting from persistent operational issues, see “SEC Settlement Suggests that Hedge Fund Managers Have Responsibility for Counterparties’ Reporting Obligations
,” Hedge Fund Law Report, Vol. 8, No. 29 (Jul. 23, 2015). For discussion of similar enforcement actions, see “SEC Summary Judgment Emphasizes the Importance of Disclosure of and Client Consent to Cross Trades and Principal Transactions
,” Hedge Fund Law Report, Vol. 8, No. 15 (Apr. 16, 2015); and “Two Recent Enforcement Actions Elucidate the SEC’s Perspective on Principal Transactions
,” Hedge Fund Law Report, Vol. 7, No. 40 (Oct. 24, 2014).