Yesterday, the Office of Compliance Inspections and Examinations (“OCIE”) published a list of five compliance topics most frequently identified in deficiency letters sent to registered investment advisors, including deficiencies with investment advisor policies and procedures.
The five most frequent compliance issues that continue to come up in exams are as follows:
- Investment Advisor policies and procedures-SEC Rule 206(4)-7 requires investment advisors to put in place compliance manuals that are reasonably tailored to the advisor’s business practices; appoint a Chief Compliance Officer to have oversight of the policy and procedures and to perform on at least an annual basis a review of those policy and procedures.
The compliance issues found are that investment advisors are not tailoring their compliance manual to their business practice; annual reviews are not being performed; compliance manuals are not kept current; and, the investment advisor is not following the policies and procedures outlined within the Compliance Manual.
- Regulatory Filings are not timely filed or accurately completed.
Registered investment advisors are required to file their Annual Amendment filing, within 90 days of their fiscal year end; or more frequently if a change has occurred within the firm’s business model. Rule 204(b)-1 of the Advisers Act requires investment advisors to one or more private funds with private fund assets of at least $150 million to file a Form PF; and, Rule 503 under Regulation D of the Securities Act of 1933 requires issues to file Form D on behalf of their private fund clients. The compliance issue found is that investment advisors are not timely filing these reports; and/or the information contained within the filing is inaccurate.
- Custody Rule. Registered investment advisors that have custody of client cash or securities must comply with Custody Rule 206(4)-2 under the Advisers Act.
Examples of exam deficiencies with respect to the Custody Rule by investment advisors are that advisors did not recognize that they may have custody due to online access to client accounts; the surprise annual exam required by investment advisors with custody, did not meet the requirements of the Custody Rule; and, investment advisors did not recognize that they had custody as a result of certain authority over client accounts.
- Code of Ethics Rule. Registered investment advisors are required under Rule 204A-1 of the Advisers Act to adopt and maintain a Code of Ethics that among other requirements, must establishes a standard of business conduct for all of the advisors supervised persons; the Code requires the advisor’s ‘access persons’ to report their personal securities transactions and holdings to the Chief Compliance Officer of the firm; and, requires those ‘access persons’ to obtain the advisors pre-approval before investment in initial public offerings or private placements.
OCIE found investment advisors had not identified their access persons; the Code of Ethics was missing required information under the rule; access persons had not submitted their transactions and holdings reports on a timely basis; and, investment advisors did not have a description of the Code of Ethics in their Form ADVs.
- Books and Records Rule. Registered investment advisors are required to make and keep certain books and records relating to their investment advisory business as outlined in Rule 204-2 of the Advisers Act.
The exam deficiencies found where that investment advisors did not maintain all the required records; the books and records were not up to date or were inaccurate; and, in some cases the investment advisor had inconsistent recordkeeping.
All of the above exam deficiencies are preventable. As you review the information provided above and within the February 7, 2017 OCIE Risk Alert, review your own investment advisory practices, particularly in the area of investment advisor policies and procedures, to confirm that when the SEC examines your firm, none of these items will be an issue.
Registered Advisor Services can assist with more information about how to handle your RIA compliance requirements. Contact the firm today!