The SEC filed an order for administrative and cease-and-desist proceedings against Cincinnati-based Horter Investment Management and its CEO, Drew Horter. Horter Investment was ordered to pay a civil money penalty in the amount of $100,000 to the SEC.

According to the securities regulator, an investigation following the 2019 conviction of Kimm Hannan, an investment advisor representative at Horter Investment who misappropriated more than $728,000 from the firm’s clients, found that both Horter Investment and Drew Horter failed to reasonably supervise Hannan during the course of his employment.

In addition to being fined $50,000 by the SEC, Drew Horter was suspended from associating in a supervisory capacity with any broker, dealer, investment adviser, municipal securities dealer, municipal adviser, transfer agent, or nationally recognized statistical rating organization for a period of six months.

Hannan is currently serving a 20-year prison term at the Lorain Correctional Institution in Grafton, Ohio, following his conviction in this matter.

Supervising basics

Hannan worked for Horter Investment from December 2014 through March 2017, and like most of Horter Investment’s investment advisor representatives, he worked remotely as an independent contractor.

Around the time Hannan started with the firm, the SEC’s examination staff had issued a deficiency letter unrelated to his work saying that Horter Investment had “failed to conduct adequate annual compliance reviews [and] failed to implement an effective compliance program.”

In addition, the consultant Horter Investment hired to review its compliance program following that examination noted the firm’s growth had “obviously outpaced its supervisory, compliance and operation capabilities.” That consultant advised that the firm should develop more detailed procedures for supervising its remote adviser reps, according to the filing.

Overall, more than half of the investment adviser reps hired by Horter Investments since November 2014 were identified as high or moderate risk, the filing said.

The SEC alleges, though, that neither Horter Investment nor Horter took any significant steps to remedy the shortcomings of its compliance program from December 2014 to March 2017 – which is when Hannan misappropriated more than $728,000 by diverting funds from Horter Investment client accounts into two of his own outside business activities.

The SEC said Hannan and used the money for a variety of expenses unrelated to those businesses, including such things as gambling, alimony and support payments for his ex-wife, personal credit card bills, rent on the building for his investment advisory services businesses, plus car payments and insurance.

Overall, more than half of the investment adviser reps hired by Horter Investments since November 2014 were identified as high or moderate risk, the filing said. And, as noted above, a consultant in 2015 warned the firm that higher risk adviser reps required a program of closer supervision, especially during their first years.

In addition, in September 2016, Horter Investment’s compliance officer reminded the firm it needed to further develop its supervision program.

Despite these warnings, Horter Investment and Drew Horter did not institute any supervision procedures until right after they became aware of Hannan’s misappropriation and right before they terminated him, according to the filing.

At one point, following a regulatory inquiry by FINRA into Hannan’s misbehavior at a previous firm, the compliance officer at Horter recommended that Drew Horter terminate Hannan’s contract, but the CEO rejected that recommendation, according to the filing. The compliance officer completed annual reviews in f2015, 2016 and 2017, but the CEO did not supervise the reviews or ask for the results.

In terms of red flags, 17 distribution requests were made from Hannan’s Horter Investment clients with the proceeds going to Hannan Properties – one of Hannan’s outside business activities – and all those flags went uninvestigated.

In a nutshell

The filing states that Horter and his firm failed to reasonably supervise Hannan in four areas:

• failing to establish supervisory policies and procedures;
• failing to implement those policies and procedures;
• failing to follow up on red flags;
• failing to delegate supervisory authority.

The SEC said: “Horter purported to delegate his supervisory responsibilities to others at Horter Investment, but those delegations were not reasonable. Horter’s delegations of supervisory responsibility were ad hoc and not followed up on or monitored.” The SEC also said: “If the Compliance Officer
did not come to him with an issue, Horter did not ask if there were any issues.”

And this was true even though a consultant, FINRA, and the compliance officer had warned him about Hannan’s misconduct, and even though Hannan had a prior disciplinary record.

Compliance Program Rule

The SEC charged Horter and his firm with violating SEC Rule 206(4)-7, also called the Compliance Program Rule.

This rule requires each investment company and investment adviser registered with the SEC to adopt and implement written policies and procedures reasonably designed to prevent violation of the federal securities laws, review those policies and procedures annually for their adequacy and the effectiveness of their implementation, and designate a chief compliance officer to be responsible for administering the policies and procedures.