As part of the Office of Compliance Inspections and Examination’s (OCIE) focus on protecting retail investors, the staff conducted a series of examinations to assess the oversight practices of SEC-registered investment advisers (“advisers”) that previously employed, or currently employ, any individual with a history of disciplinary events (“Supervision Initiative” or “Initiative”). On July 23, 2019, OCIE issued a Risk Alert to raise awareness regarding certain compliance issues that OCIE observed, by sharing the staff’s observations from those examinations.
The Supervision Initiative conducted over 50 examinations of advisers in 2017 and focused on advisers’ practices in certain areas, including compliance programs, supervisory oversight practices, disclosures and conflicts of interest. The Initiative identified a variety of observed deficiencies from across different topics.
A vast majority of deficiencies related to compliance issues, but several related to disclosure issues, including undisclosed conflicts of interest.
Full and Fair Disclosure:
The staff observed that nearly half of the disclosure-related deficiencies of the advisers examined were due to the firms providing inadequate information regarding disciplinary events. This included not disclosing a reportable event, disclosing incomplete, confusing or misleading information, and untimely updating and delivering disclosure documents to clients (i.e., Form ADV or Form U5).
Effective Compliance Programs:
The staff observed that many advisers did not adopt and implement compliance policies and procedures that included processes reasonably designed to identify whether the supervised persons’ self-attestations included a complete and accurate description of disciplinary events disclosed or if the self-attestations included all reportable events.
The staff observed that many advisers did not have policies and procedures that sufficiently document the responsibilities of supervised persons, nor did these clearly outline the expectations for the individuals involved, as it related to the following topics:
Advisers’ policies and procedures did not address how advisers monitored whether fees charged by supervised persons were disclosed or assess whether the services clients paid for were performed, including instances where clients paid for certain services they did not receive or were charged undisclosed fees.
Advisers’ policies and procedures did not provide enough guidance to supervised persons, who prepared their own advertising materials and websites to ensure dissemination of advertisements complied with the requirements of the advertising rule.
Advisers did not review activities of supervised persons, including those with disciplinary histories, working from branch or remote locations as part of its monitoring activities, to ensure the supervised persons were operating in a self-directed manner that was consistent with the advisers’ policies and procedures.
- Compliance Policies and Procedures:
The staff observed that several advisers had adopted policies and procedures that were inconsistent with their actual business practices and disclosures. Areas with the most inconsistent compliance practices cited by the staff involved those addressing commissions, fees and expenses (e.g., solicitation fees, management fees, compensation related to hiring personnel, etc.).
- Annual Compliance Reviews:
Advisers’ annual reviews were insufficient because the firms did not take steps to adequately document the reviews and appropriately assess the risk areas applicable to the firms or identify certain risks at all.
For further information, please find the entire report here.