OCIE Identifies Five Most Common Adviser Compliance Deficiencies

Investment Management Update

Date: February 14, 2017

Key Notes:

  • OCIE named the five compliance issues most frequently cited in deficiency letters to investment advisers.
  • As a matter of routine business practice, advisers should periodically review their business policies and procedures to ensure compliance with the Advisers Act.
  • Advisers must take immediate corrective measures to remedy lapses in compliance.


The SEC’s Office of Compliance Inspections and Examinations (OCIE) has identified the five compliance issues it raised most often in deficiency letters to investment advisers within the past two years. OCIE frequently identified errors and omissions in required regulatory filings, and noted failures to comply with the compliance, custody, code of ethics, and books and records rules of the Investment Advisers Act of 1940 (Advisers Act).

Required Regulatory Filings

OCIE often issues deficiency letters to advisers because of inaccurate or untimely regulatory filings. Most commonly, advisers incorrectly disclose information on Form ADV Part 1A or in Form ADV Part 2A brochures, inaccurately or incompletely prepare Forms PF and D, or belatedly amend Form ADV. Advisers are reminded to carefully review all filings to ensure accuracy and thoroughness. An adviser must also amend Form ADV annually within 90 days of the end of its fiscal year, if not required to do so more frequently.

Compliance Rule

Rule 206(4)-7 requires an adviser to maintain a written compliance manual containing policies aimed at preventing Advisers Act violations. The adviser must review those policies at least annually and designate a chief compliance officer to administer them. OCIE observes that compliance manuals often are out-of-date or not reasonably tailored to the adviser’s business. Advisers must not rely on “off-the-shelf” compliance manuals, but instead should develop customized policies to reflect their current investment strategies. OCIE further notes that annual reviews often fail to examine the adequacy or effectiveness of compliance policies. Advisers are cautioned to follow their compliance manuals faithfully and to timely address problems identified in their annual reviews.

Custody Rule

To protect shareholders, Rule 206(4)-2 imposes requirements on advisers who have custody of their clients’ assets. An adviser has custody of assets when it (or its related persons) holds clients’ funds or securities (either directly or indirectly) or has authority to obtain them. OCIE observes that many advisers are unaware that they have custody as a result of online access to, or certain authority over, client accounts. An adviser must comply with the custody rule if it is able to withdraw clients’ funds and securities online, if it has power of attorney authorizing it to withdraw clients’ cash and securities, or if it is a trustee of clients’ trusts or a general partner of clients’ pooled investment vehicles. The adviser also must provide an independent public accountant with a complete list of clients’ accounts over which it has custody and sufficient information for the accountant to timely file an accurate Form ADV-E. OCIE may issue deficiency letters when so-called “surprise” independent public accountant examinations are conducted at the same time every year.

Code of Ethics Rule

Rule 204A-1 requires an adviser to maintain a code of ethics that establishes a standard of business conduct for its supervised persons, requires “access persons” to report their personal securities transactions and holdings to the adviser’s chief compliance officer or other designee periodically, and mandates that access persons have the adviser’s pre-approval before investing in an initial public offering or private placement. The adviser must supply each supervised person with a copy of the code of ethics and obtain a written acknowledgement of receipt. It also should describe the code of ethics in Form ADV Part 2A brochures and let clients and prospective clients know that copies are available upon request.

Advisers commonly violate Rule 204A-1 by failing to identify access persons, failing to specify review of the holding and transaction reports and submission timeframes, untimely submitting transactions and holdings, or failing to describe the code of ethics or disclose its availability to clients and prospective clients in their Form ADV Part 2A brochures. An adviser should review its code of ethics regularly to ensure that the requirements of the code of ethics and the requirements of Rule 204A-1 are fully met.

Books and Records Rule

Finally, Rule 204-2 requires an adviser to maintain certain books and records pertaining to its advisory business. OCIE observes that many advisers keep inconsistent, inaccurate or incomplete records. An adviser should ensure that any separately maintained files do not contradict its books and records, update all books and records regularly to reflect, among other things, current fee schedules and client lists, and maintain all necessary records, such as trade records, advisory agreements and general ledgers.

Outlook

An adviser should periodically assess its business practices and records to ensure full compliance with the Advisers Act and take immediate corrective measures when necessary. Failure to comply with the Advisers Act’s requirements may lead not only to deficiency letters, but to further action by the Division of Enforcement.

FOR MORE INFORMATION

For more information, please contact:

Philip B. Sineneng
614.469.3217
Philip.Sineneng@ThompsonHine.com

Andrew J. Davalla
614.469.3353
Andrew.Davalla@ThompsonHine.com

Donald S. Mendelsohn
513.352.6546
Don.Mendelsohn@ThompsonHine.com

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