SEC OCIE Findings on IA Compliance
On Nov. 19, SEC issued OCIE observations re IA compliance programs
- SEC issued risk alert to provide an overview of notable compliance issues identified by OCIE related to SEC Rule 206(4)-7 (the compliance rule) under the IAA of 1940.
- Deficiencies related to the compliance rule have been among the most common cited.
- Compliance Rule Requirements
- Under the compliance rule or CR, a registered investment adviser must not provide investment advice unless it implemented certain written policies and procedures (PPs).
- Specifically, PPs reasonably designed to prevent violation of the IAA and its rules.
- Compliance rule requires investment advisers to consider their fiduciary and regulatory obligations under the IAA and to formalize policies and procedures to address them.
- The compliance rule does not enumerate elements that IAs must include in their PPs.
- Each IA's PPs should take into consideration the nature of the firm's operations.
- IAs must review their policies and procedures no less frequently than annually to determine their adequacy and the effectiveness of their implementation.
- Each adviser must designate a competent CCO to administer its compliance PPs.
- Inadequate Compliance Resources
- OCIE staff observed advisers that did not devote adequate resources, such as information technology, staff and training, to their compliance programs.
- For example, CCOs encumbered with numerous other professional responsibilities.
- Advisers that had significantly grown in size or complexity, but had not hired additional compliance staff or added adequate technology, leading to compliance failures.
- Insufficient Authority of CCOs
- OCIE staff observed CCOs who lacked sufficient authority within the investment adviser to develop and enforce appropriate policies and procedures for the firm.
- For example, advisers limiting CCO from accessing critical compliance information, such as trading exception report and investment advisory agreements with key clients.
- Also, IAs where senior management appeared to have limited interaction with their CCOs, which led to CCOs having limited knowledge about firm’s leadership, operations.
- Instances where CCOs were not consulted by senior management and employees of the adviser regarding matters that had potential compliance implications.
- Annual Review Deficiencies
- Staff observed advisers that could not demonstrate that they performed annual review or review failed to identify significant compliance or regulatory problems.
- For example, reviews that failed to identify or review critical risk areas applicable to the investment adviser, such as conflicts of interest and protection of client assets.
- Failure to Implementing Actions
- OCIE staff observed IAs that did not implement or perform actions required by PPs.
- For example, despite being stated in PPs, advisers did not train their employees, implement trade error, advertising, best execution, conflicts, disclosure procedures.
- Accurate, Complete Information
- Staff observed advisers PPs with outdated or inaccurate information about the firm.
- This included off-the-shelf policies that contained unrelated or incomplete information.
- Reasonably Designed Policies, Procedures
- OCIE staff observed advisers that did not appropriately tailor their PPs to the firm.
- Also, others' PPs were not reasonably designed to prevent violations of the IAA.
- For example, some advisers utilized the policies of an affiliated entity, such as a broker-dealer, that were not tailored to the specific business of the advisers.
- Some IAs claimed to rely on cursory or informal processes instead of written PPs.
- Deficient Areas
- Even if firms maintained written PPs, staff observed deficiencies or weaknesses with establishing, implementing or appropriately tailoring certain key compliance areas.
- Those areas are: portfolio management; marketing; trading practices; disclosures.
- Also, advisory fees and valuation; client privacy; and books and records.
- Finally, safeguarding of client assets; custody; and business continuity plans.
||B/D; Fiduciary; IA; MIA; Muni
||PR, Al, 11/19/2020; Citation: SEC Rule 206(4)-7;
||Compliance; Exams; Financial; Legal; Operations
||United States of America
||Fixed Income; Issuance/IPO; Municipal; Securities
|Reg. Last Update
Last substantive update on 11/20/2020