The SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert concerning the compliance topics most frequently identified in deficiency letters that OCIE has sent to SEC-registered investment advisers during the past two years.
The five most frequently identified deficiencies or weaknesses concerned the following Advisers Act rules and requirements generally: (1) Rule 206(4)-7 (the Compliance Rule); (2) required regulatory filings; (3) Rule 206(4)-2 (the Custody Rule); (4) Rule 204A-1 (the Code of Ethics Rule); and (5) Rule 204-2 (the Books and Records Rule). Within these general categories, the issues noted by OCIE included the following:
• compliance manuals and/or programs were not reasonably tailored to the investment adviser’s business; for example, by not taking into account important individualized business practices such as the adviser’s particular investment strategies, types of clients, trading practices, valuation procedures and advisory fees;
• annual reviews were either not performed or failed to address the adequacy of the investment adviser’s policies and procedures;
• the investment adviser did not follow compliance policies and procedures; and
• compliance manuals were not current; for instance, manuals included references to terminated investment strategies, departed personnel and stale information about the firm.
• Form ADV filings and amendments were untimely or contained inaccuracies, including inaccurate disclosures relating to custody, regulatory assets under management, disciplinary history, client types and conflicts; and
• Form PF and Form D filings were untimely or contained inaccuracies.
• the investment adviser did not recognize that it may have custody due to online access to client accounts or as a result of certain authority over client accounts; and
• the investment adviser with custody had surprise examinations that did not meet the requirements of the Custody Rule; for example, by failing to provide accountants with a complete list of accounts over which the investment adviser had custody or by having “surprise” exams conducted at the same time each year.
Code of Ethics Rule:
• the firm’s list of “access persons” failed to identify certain employees, partners or directors;
• the code of ethics failed to include required information, such as the requirements for reporting and reviewing personal holdings and transaction reports;
• “access persons” made untimely submissions of personal holdings and transaction reports; and
• the investment adviser’s Form ADV Part 2A brochure failed to include a description of the firm’s code of ethics and that prospective clients may request a copy of such code of ethics.
Books and Records Rule:
• the investment adviser failed to maintain required records, such as trade records, advisory agreements and general ledgers;
• the investment adviser had errors or omissions in its books and records, including inaccurate fee schedules and outdated client records; and
• the investment adviser’s recordkeeping was inconsistent, with contradictory information in separate sets of records.
The Risk Alert notes that the examinations within the scope of OCIE’s review resulted in a range of actions. Among other things, investment advisers took remedial measures, such as enhancing written compliance procedures, policies or processes; changing business practices; or devoting more resources or attention to the area of compliance. In addition, the Risk Alert indicates that, where appropriate, the staff referred examinations to the Division of Enforcement for further action.