OCIE Highlights the Top 5 Compliance Topics from Examinations of Investment Advisers


Posted on February 10, 2017, by Mary P. Hansen and Nicholas S. Feltham in Compliance Rule, Custody Rule, Ethics Rule, Form ADV, Investment Advisers, OCIE, Office of Compliance Inspections and Examinations, SEC Guidance. Comments Off on OCIE Highlights the Top 5 Compliance Topics from Examinations of Investment Advisers

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 did not address the adequacy of the adviser’s policies and procedures;
  • Compliance manuals were not reasonably tailored to the adviser’s business practices; and
  • Compliance manuals were not current.

Regulatory Filings

OCIE frequently cited advisers for failing to make timely and complete regulatory filings, such as Form ADV (as required by Rule 204-1 under the Advisers Act), Form PF (as required by Rule 204(b)-1 under the Advisers Act), and Form D (as required by Rule 503 under Regulation D of the ’33 Act) on behalf of an adviser’s private fund clients. Timely, accurate, and appropriately amended regulatory filings, especially for these three forms, should be a priority for all advisers.

The Custody Rule

The Custody Rule, which applies to advisers who have custody of client cash or securities, is designed to safeguard client assets from unlawful activity or financial problems of the adviser.  OCIE identified the following common deficiencies or weaknesses with respect to the Custody Rule:

  • Advisers did not recognize they had “custody” due to: (1) having online access to client accounts, or (2) having other authority over client accounts (such as having power of attorney or serving as a trustee of client trusts); and
  • Surprise examinations by independent accountants were not actually a surprise, and advisers failed to fully disclose custody lists during surprise examinations.

The Code of Ethics Rule

The Code of Ethics Rule requires that advisers adopt and maintain a code of ethics that meets certain minimum requirements, and which is described in Form ADV and made available to clients or prospective clients. Deficiencies or weaknesses regarding the Code of Ethics Rule were often found because:

  • Advisers failed to identify all of their access persons;
  • Codes did not specify review of the holdings and transactions reports, and did not identify specific submission timeframes;
  • Submission of transactions and holdings were untimely; and
  • Advisers failed to describe their code of ethics in Form ADV.

The Books and Records Rule

The maintenance of books and records as dictated by SEC requirements is another frequent problem area according to OCIE. Some advisers had contradictory information within separate sets of records, while other advisers either maintained inaccurate records or failed to update their records in a timely fashion. Worse still, other advisers simply failed to maintain all of the records that the Books and Records Rule requires them to keep.





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