Pursuant to their fiduciary duties, investment advisers have certain obligations to seek out “best execution” for client transactions. The SEC’s Office of Compliance Inspections and Examinations (OCIE) recently issued a Risk Alert identifying deficiencies found during examinations of investment advisers’ compliance with their best execution obligations.
In this alert, partner Jim Lundy and associate Kellilyn Greco outline OCIE’s findings, including background on best execution, notable deficiencies, and recommended best practices.
Read the full alert.
Over the last two weeks, the SEC has put robo-advisers on notice that they are on the staff’s radar. First, on February 23, 2017, the SEC’s Division of Investment Management, along with the SEC’s Office of Compliance, Inspections, and Examinations, issued a Guidance Update for robo-advisers. The term “robo-adviser” refers to registered automated investment advisers that provide investment advice that uses computer algorithms. Robo-advisers generally collect information about a client’s financial goals, income, assets, investment horizon, and risk tolerance by way of an online or electronic questionnaire. With limited human interaction, robo-advisers use this information to create and manage investment portfolios for clients. Robo-advisers are often more economical than traditional investment advisers. Robo-advisers, which began as an appeal to millennials, are now widely becoming popular with all age groups and types of investors.
The Guidance Update focused on in three unique … Read More »
Last week, the Securities and Exchange Commission (SEC) Acting Chairman, senior leadership across Divisions and Offices, and former SEC Commissioners spoke at the “SEC Speaks” Conference 2017. Senior leadership from the SEC’s Office of Compliance Inspections and Examinations (OCIE) used its panel and workshop to provide guidance on the reshaping of its examination programs that it began in 2016. Below we outline the revamped OCIE.
OCIE’s Reorganization & Reallocation of Resources
The OCIE panel included OCIE’s Acting Director and its Deputy Director. The commentators for the panel were former SEC Chairman Hon. Harvey L. Pitt and former SEC Commissioners Hon. Paul S. Atkins and Hon. Daniel M. Gallagher. At the beginning of the presentation, OCIE’s Acting Director reminded the audience that OCIE’s mission is to protect investors, ensure market integrity, and support responsible capital formation through risk-focused strategies that: 1) improve compliance; … Read More »
On February 7, 2017, the Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert discussing the five most frequent compliance topics identified in OCIE examinations of investment advisors. The Alert was compiled based on deficiency letters from over 1,000 investment adviser examinations completed during the past two years. The top five topics are: (1) the Compliance Rule; (2) Regulatory Filings; (3) the Custody Rule; (4) the Code of Ethics Rule; and (5) the Books and Records Rule.
The Compliance Rule
The Compliance Rule requires: (1) written and policies and procedures reasonably designed to prevent violations of the Advisers Act; (2) annual review of the policies and their implementation; and (3) a chief compliance officer who monitors the policies and procedures. Examples of common Compliance Rule problems included:
Advisers did not follow their compliance policies and procedures;
Annual reviews were not performed or … Read More »
On January 12, 2017, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) announced its examination priorities for 2017. This year’s priorities are focused around three topics: (1) retail investors, (2) senior investors and retirement investments, and (3) market-wide risks. These priorities affect investment advisers, investment companies, broker-dealers, transfer agents, clearing agencies, private fund advisers, national securities exchanges, and municipal advisers.
Protecting retail investors remains a primary concern of OCIE. So it’s no surprise that its detailed areas of focus continue to include: risks related to electronic investment advice (i.e. “robo-advising”), “wrap fee” programs where investors are charged a single fee for bundled advisory and brokerage services, and “Never-Before Examined Investment Advisers,” an initiative started in 2014. OCIE will also continue to focus on its Exchange-Traded Funds (ETFs).
To protect senior investors, OCIE will continue its ReTIRE initiative with focuses on investment … Read More »
The Securities and Exchange Commission (SEC or Commission) Office of Compliance Inspections and Examination (OCIE) issued a Risk Alert on October 24, 2016, titled “Examining Whistleblower Rule Compliance.” This recent Risk Alert continues the SEC’s aggressive efforts to compel Rule 21F-17 compliance and puts the investment management and broker-dealer industries on formal notice that OCIE intends to scrutinize registrants’ compliance with the whistleblower provisions of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank). By way of background, Dodd–Frank established a whistleblower protection program to encourage individuals to report possible violations of securities laws. Importantly, in addition to providing whistleblowers with financial incentives, Rule 21F-17 provides that no person may take action to impede a whistleblower from communicating directly with the SEC about potential securities law violations, including by enforcing or threatening to enforce a severance agreement or a … Read More »
SEC Charges Investment Adviser with Failure to Adopt Proper Cybersecurity Policies and Procedures Prior to Cyberattack
On Tuesday, September 22, 2015, the SEC charged an investment adviser with failing to adopt a written policy and procedure reasonably designed to safeguard customer records and information. The charge spawned from a July 2013 cyberattack on the investment adviser’s third party-hosted server, which potentially compromised the personally identifiable information (“PII”) of over 100,000 individuals stored on the server. Without admitting or denying the SEC’s findings, the investment adviser has agreed to settle the charge for approximately $75,000 and cease and desist from committing or causing any future violations of the SEC’s “Safeguards Rule.”
Rule 30(a) of Regulation S-P (the “Safeguards Rule”) requires every investment adviser registered with the SEC to adopt written policies and procedures reasonably designed to safeguard customer records and information. Specifically, the policies and procedures must be reasonably designed to: (1) insure the security and confidentiality of … Read More »
Director of SEC’s Division of Investment Management Provides Insights into Agency’s View of Alternative Mutual Funds and Focus of Upcoming Sweep Exam
On June 30, 2014, in remarks to the Practising Law Institute’s Private Equity Forum, Norm Champ, Director of the SEC’s Division of Investment Management, addressed the increase in the number of mutual funds that use alternative investment strategies and the potential risks that the Division of Investment Management has identified with those strategies. See SEC Press Release. Champ’s observations are particularly relevant in light of the Office of Compliance Inspections and Examination’s (“OCIE’s”) announcement that it will conduct a national sweep exam involving between fifteen and twenty alternative mutual funds beginning this summer and continuing into the fall. According to Champ, the exams are intended to produce valuable insight into how alternative mutual funds attempt to generate yield and how much risk they undertake, in addition to monitoring how boards are overseeing the funds’ operations. To that end, Champ said … Read More »
In remarks to a group of compliance officers from investment advisers to private equity funds in New York City, Andrew J. Bowden, the director of the SEC’s Office of Compliance Inspections and Examinations, announced that the Exam staff has identified violations and material control weaknesses at more than half of all private equity advisers examined pursuant to the SEC’s recent initiative to examine recently registered advisers (commonly referred to as “Presence Exams”). See Spreading Sunshine in Private Equity.
According to Bowden, OCIE has conducted Presence Exams of more than 150 newly registered private equity advisers since October 2012 and is on track to complete its goal of examining 25% of the new private fund registrants by the end of this year. Bowden noted that private equity funds have historically involved limited transparency, limited investor rights, and significant opportunities for conflicts of interest. … Read More »
Since the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, private funds have become the subject of heightened scrutiny by both the SEC’s Division of Enforcement and the Office of Compliance Inspections and Examinations (“OCIE”). Based on recent announcements, this trend is likely to continue.
In 2012, OCIE announced an initiative to conduct “Presence Exams” or focused, risk-based examinations of investment advisers to private funds who recently registered with the SEC. See the OCIE’s National Exam Program letter. More recently in the SEC’s 2014 CCO Outreach Program, the SEC announced that it had conducted 250 Presence Exams. The SEC added that many of the exams revealed “significant findings,” but did not disclose whether those findings led to enforcement referrals or were resolved in the deficiency letter process. The SEC reiterated that focus areas of the Presence … Read More »