OCIE examiners report common branch office compliance deficiencies

November 11, 2020

WHAT HAPPENED?

On Nov. 9, 2020, the Office of Compliance Inspections and Examinations of the U.S. Securities and Exchange Commission (OCIE) released a new Risk Alert outlining recent observations from examinations of SEC-registered investment advisers. In general, advisers with numerous branch offices are at risk of procedural and compliance inconsistencies if policies and procedures are not followed across all office locations.

Of the examined advisers operating multiple branch offices, OCIE officials compiled a list of common deficiencies and compliance concerns as well as some positive compliance observations. Key takeaways from the Risk Alert are below:

Supervisory and compliance deficiencies

• Many advisers were found to be in violation of the Compliance Rule. Common examples of the violations include:
  • Policies and procedures that were outdated, including those that:
    • mentioned branch offices no longer in existence;
    • mentioned personnel no longer in their cited positions; or
    • were improperly enforced or implemented across remote locations.
  • In some cases, advisers did not recognize they had custody of client assets by failing to adopt policies and procedures which would limit supervised persons who were located in remote offices the ability to process withdrawals and deposits or change client addresses of record.
  • Some advisers did not properly relate or remediate instances where undisclosed fees were charged to clients. This was most often due to policies and procedures not being in place or not being enforced.
  • Deficiencies in supervision were found, including:
    • failure to disclose relevant disciplinary information;
    • supervised persons making recommendations to clients which were not in the clients’ best interest; and
    • failure to enforce supervisory policies and procedures.
  • Problematic advertisements were often found, specifically those produced by supervised persons located in branch office locations or when a “doing business as” name was being used.
    • Deficient advertisements often included elements like performance reporting without proper disclosures, unsupported claims, or falsely stated credentials of the firm or its personnel. These items likely had not gone through the normal compliance review.
  • Many code of ethics violations were found, such as:
    • failure to comply with reporting requirements;
    • failure to review transactions and reports;
    • omission of required provisions within codes of ethics; or
    • improperly identifying access persons.

Investment advice deficiencies

• In some cases, advisers were found to have poor oversight of investment recommendations.
  • These deficiencies were most often found in connection with mutual fund share class selection practices and disclosures or recommendations and disclosures related to wrap fee programs.
• Some advisers did not properly disclose conflicts of interest, like expense allocations that disproportionately benefitted proprietary fund clients or undisclosed financial incentives granted to advisers or other persons for recommending certain investments.
• Issues around trading and allocation of investment opportunities were common, including:
  • inadequate or missing documentation of analyses for obtaining the best execution for clients;
  • completing transactions without a client’s consent; and
  • little or no oversight of supervised persons who executed trades.

Helpful compliance oversight observations

• When managing multiple branch offices, some firms adopted and implemented policies and procedures which are applicable across all locations, account for differences among branch offices, and allow for proper oversight of all office locations.
• Some offices had broad policies and procedures in place, but included provisions to address different branch locations, as needed.
  • These often also required extra reporting from remote locations, like a streamlined advertising approval process, processes to manage client billing, consistent portfolio management policies and procedures and portfolio management systems, and procedures for approving and monitoring personal trading among employees.
• Advisers conducted at least annual compliance testing of key activities at all office locations; these included ensuring proper review of portfolio management, designating individuals in each office location to oversee portfolio management monitoring, consolidating branch office trading activities with overall testing practices, and conducting in-depth compliance reviews that extend beyond self-reporting from personnel.
• In some cases, advisers implemented policies and procedures requiring diligence on supervised persons in order to check for disciplinary histories.
• Many of the examined advisers also required annual or semi-annual compliance training for all branch office employees.

WHAT DOES THIS MEAN FOR ME?

Many of these compliance deficiencies are not exclusive to advisers with branch offices and affect a variety of firm types, specifically those working with retail clients.

Fairview can assist your firm with drafting, adopting, and implementing compliance policies and procedures; conducting compliance training for employees; streamlining its marketing and advertising review process; or updating code of ethics processes.

Contact Fairview today if your firm manages multiple branch office locations and would like more information on how this Risk Alert may affect your business.