OCIE Reports on Most Common Investment Adviser Compliance Issues


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The SEC’s Office of Compliance Inspections and Examinations (OCIE) recently identified the five compliance topics that appear most frequently in deficiency letters sent to registered investment advisers). The five topics are:

  • Advisers Act Rule 206(4)-7 (the “compliance rule”);
  • Required regulatory filings;
  • Advisers Act Rule 206(4)-2 (the “custody rule”);
  • Advisers Act Rule 204A-1 (the “code of ethics rule”); and
  • Advisers Act Rule 204-2 (the “books and records rule”).

The Compliance Rule

Investment Advisers Act Rule 206(4)-7, the compliance rule, requires each registered investment adviser to adopt and implement conforming compliance programs. The failure of an adviser to have adequate compliance policies and procedures in place constitutes a violation of the rule independent of any other securities law violation. The rule allows the SEC to address the failure of an adviser to have adequate compliance controls in place before that failure has a chance to harm clients.

The OCIE staff identified several common deficiencies or weaknesses in compliance programs established by registered advisers. According to the staff, advisers produced generic compliance manuals that did not reflect the advisers’ particular strategies and practices, client base, valuation procedures and advisory fees. Advisers also failed to conduct adequate annual reviews of their compliance policies and procedures, and to keep compliance manuals current.

The staff also determined that some advisers failed to comply with their own policies and procedures. These advisers failed to perform required internal practice reviews and did not adhere to required practices relating to marketing, expenses or employee behavior.

Regulatory Filings

The OCIE staff found that certain advisers made inaccurate disclosures on Form ADV Part 1A or in their Form ADV Part 2A brochures, such as inaccurately reporting custody information, regulatory assets under management, disciplinary history, types of clients and conflicts. Advisers also failed to file updates in a timely fashion.

The staff also noted problems with Form PF filings. Private funds use Form PF to report regulatory assets under management to the Financial Stability Oversight Council. According to the staff, some advisers subject to a Form PF filing requirement did not complete the form accurately or completely. Advisers also failed to timely Form D notices on behalf of their private fund clients. 

Custody Rule

In 2009, the SEC adopted amendments to its custody rule to provide additional safeguards under the Advisers Act when a registered adviser has custody of client funds or securities. Advisers with custody of client assets must, among other things, undergo an annual surprise examination by an independent public accountant to verify client assets. The qualified custodian maintaining client funds and securities must also send account statements directly to the advisory clients. Unless an independent custodian maintains the client assets, the adviser must obtain, or receive from a related person, a report of the internal controls relating to the custody of those assets from an independent public accountant.

The staff identified several deficiencies they encountered in their examinations under the custody rule. Some advisers were unaware that they had custody resulting from having online access to client accounts. Such access may meet the definition of custody when such access provides the adviser with the ability to withdraw funds and securities from the client accounts. The staff observed that certain advisers may not have properly identified custody as a result of them having access to online accounts using clients’ personal usernames and passwords. 

Some surprise examinations were also insufficient, as some advisers did not provide the examiners with a complete list of accounts over which the adviser had custody or otherwise provide accurate information to the examining accountants. Some accounting firms also conducted the examinations at the same time every year, effectively negating to permit the accountants to timely file accurate Form ADV-Es. In addition, staff observed indications suggesting that surprise examinations may not have been conducted on a “surprise” basis (e.g., exams were conducted at the same time each year). 

Code of Ethics Rule

The code of ethics rule, adopted in 2004, requires advisers to establish a code of ethics that defines standards of conduct and requires compliance with the federal securities laws. The code must also address personal trading and require adviser personnel to report their personal securities holdings and transactions. Adviser personnel must also obtain pre-approval of certain investments. Advisers must keep copies of their codes of ethics and documents relating to the code as part of their books and records, and must describe their codes of ethics to their clients in Part II of Form ADV.

The staff observed that certain advisers did not properly identify all of their access persons, defined as supervised persons who:

  • have access to nonpublic information regarding clients' purchase or sale of securities;
  • are involved in making securities recommendations to clients; or
  • have access to such recommendations that are nonpublic.

Some adviser codes lacked required information, including the mandatory review of holdings and transaction reports, or did not identify the specific information submission timeframes. Advisers also failed to adequately describe their ethics codes in their Form ADV filings.

Books and Records Rule

The OCIE staff also noted that some advisers fail to comply with the rule that requires advisers to make and keep certain books and records, including typical accounting and other business records. According to the staff, some advisers did not maintain all required records, and some records were inaccurate or out of date.

Examination Priorities for 2017

OCIE released its findings on the heels of issuing its 2017 examination priorities. For this year, OCIE will focus on retail and elderly investors, and review for market-wide risks. With regard to market risks, the staff will concentrate on:

  • compliance by money market funds;
  • best execution and payment for order flow;
  • systemically important clearing agencies;
  • enhanced FINRA oversight;
  • Regulation SCI compliance (security, integrity and resilience of automated systems central to the performance of regulated activities) by exchanges, automated trading systems, clearing agencies and other entities;
  • cybersecurity;
  • risk-based monitoring of national securities exchanges; and
  • anti-money laundering.

In addition to these matters, the staff will also address municipal advisors, transfer agents and private fund advisers. OCIE noted that while the office will allocate significant resources in to these issues, the staff will also conduct examinations focused on risks, issues and policy matters arising from market developments, new information derived from examinations, tips, complaints and coordination with other agencies, as well as other regulatory developments.