United States: OCIE Identifies Top Five Adviser Compliance Issues

Last Updated: February 21 2017
Article by Kelley A. Howes

In a new Risk Alert, OCIE's National Exam Program provided investment advisers with insight into the five compliance topics most frequently identified in its exam deficiency letters. Registered investment advisers should review their compliance policies and procedures to ensure they have adequately addressed these issues.

OCIE also provided examples of the types of deficiencies they see within each compliance topic.

Compliance Rule. OCIE continues to find deficiencies in compliance programs adopted and implemented by registered investment advisers as required by Rule 206(4)-7.

  • According to OCIE, advisers continue to use "off-the-shelf" compliance manuals without adequately tailoring their compliance programs to the types of clients and strategies that they manage.
  • OCIE also raised concerns that some advisers are not conducting annual reviews of their compliance programs, as required by Rule 206(4)-7. Moreover, even when reviews are conducted, OCIE is concerned that such reviews do not address the effectiveness of a compliance program or address identified issues.
  • OCIE underscored that the Rule requires advisers not only to adopt compliance policies but also to implement them. Advisers should be able to document that they follow their procedures.
  • Finally, OCIE raised concerns that some advisers are not maintaining their compliance policies and procedures as their businesses change.

Regulatory Filings. OCIE said that it has found deficiencies related to advisers' complying with their regulatory filing obligations. In particular, OCIE raised concerns about filings on Form ADV, Form PF, and Form D.

  • OCIE called out inaccurate disclosures in Form ADV Part 1A and Part 2A, including inaccuracies related to whether an adviser has custody of client assets, calculation of regulatory assets under management, disciplinary history and conflicts of interest.
  • OCIE also said that it continues to identify advisers that fail to promptly update Form ADV as required by the Form, or to timely file their annual amendment.
  • OCIE is concerned that advisers that have an obligation to file Form PF or Form D are not completing such forms accurately.

Custody Rule. In addition to the concerns raised regarding disclosure about custody of client assets, OCIE separately voiced a concern that advisers continue to misinterpret the custody rule.

  • OCIE said that advisers continue to fail to recognize when they have custody of client assets. In particular, this can arise when an adviser has online access to client accounts or a power of attorney that gives the adviser the ability to withdraw client funds or securities. This includes the use of a client's personal username and password.
  • Moreover, OCIE said, advisers with custody of client assets are failing to provide independent accountants charged with conducting surprise examinations with a full list of accounts over which an adviser has custody. As a result, accountants may not be able to timely file accurate Forms ADV-E. OCIE also questioned whether surprise audits were actually conducted on a "surprise" basis.

Code of Ethics. OCIE raised several concerns about advisers' compliance with the requirement to adopt and maintain a code of ethics.

  • OCIE said that advisers are not identifying all of their access persons for purposes of reviewing personal securities transactions. In addition, according to OCIE, certain codes of ethics fail to specify review of such access persons' personal securities holdings reports and transaction reports.
  • OCIE noted that some access persons were submitting transaction and holdings reports less frequently than required by Rule 204A-1.
  • OCIE reminded advisers that Part 2A of Form ADV requires advisers to describe their code of ethics and to offer to make a copy of the code of ethics available to clients or prospective clients on request.

Books and Records. Recordkeeping errors are a perennial favorite of the examination staff, and OCIE said that advisers continue to demonstrate recordkeeping weaknesses.

  • Some advisers failed to maintain all books and records required by the Advisers Act and its related regulations.
  • Moreover, some required records may not be accurate or updated. Among other things, this includes the failure to update fee schedules in client accounts and having stale client lists.
  • OCIE also raised concerns that some advisers have contradictory information in separate sets of records.

Our Take. OCIE provided investment advisers with trends related to the types of compliance issues the examination staff is seeing with regularity. In general, once OCIE staff have admonished advisers of potential violations, they are less likely to simply identify these types of errors as deficiencies and may move more quickly to recommend enforcement. That is, advisers have been forewarned. Failure to take a look at compliance policies and procedures to ensure that they do not include these types of errors and omissions is more likely to result in enforcement after such a warning.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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