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Are You in Compliance? SEC Identifies Five of the Most Common Compliance Violations


2/17/2017
 
On February 7, 2017, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) issued an alert identifying the five most frequent compliance topics identified during OCIE examinations of registered investment advisers (RIAs). Based on issues addressed in deficiency letters from over 1,000 investment adviser examinations compiled over the past two years, the five most frequent compliance topics are deficiencies around: (1) the Compliance Rule; (2) regulatory filings; (3) the Custody Rule; (4) the Code of Ethics Rule; and (5) the Books and Records Rule. Investment advisers should be cognizant of these common compliance deficiencies and review their own compliance programs to avoid such weaknesses. 
 
Under the Compliance Rule, RIAs must adopt, implement, and regularly review compliance policies and procedures. Furthermore, a chief compliance officer must be appointed to ensure that policies are implemented effectively and reviewed on an annual basis, at a minimum. Examples of deficiencies revealed that are related to the Compliance Rule included:
 
  • Compliance manuals not reasonably tailored to the adviser’s business practices
  • Annual reviews not performed, or did not address the adequacy of the adviser’s policies and procedures
  • Adviser not following compliance policies and procedures
  • Outdated compliance manuals

 

Investment advisers must be aware of all required SEC filings and their due dates. For example, Form ADV must be amended annually within 90 days of fiscal year end; registered advisors of private fund(s) with assets under management of at least $150 million must file a report on Form PF; and advisors must file Form D on behalf of private clients no later than 15 calendar days after the sale of securities in the offering of a private fund. Common deficiencies related to regulatory filings included:
 
  • Inaccurate disclosures on Form ADV
  • Untimely amendments to Form ADVs
  • Incorrect and untimely Form PF filings
  • Incorrect and untimely Form D filings
 
Under the Custody Rule, advisers with custody of client assets must stay in compliance with requirements to enhance the safety of client assets by protecting investors from unlawful activities or financial problems of the adviser. The most common deficiencies found in this area consisted of: 
 
  • Advisers not recognizing that they may have custody due to online access to client accounts
  • Advisers with custody obtaining surprise examinations that do not meet the requirements of the Custody Rule
  • Advisers not recognizing that they may have custody as a result of certain authority over client accounts
 
Under the Code of Ethics Rule, an advisor must adopt and maintain a code of ethics which must be given to each employee as well as described with its ADV filing.  This code of ethics must establish a standard of business conduct within the advisor, and requires certain employees “access persons” to report personal securities transactions as well as prior approval for investments in IPOs or private placements. The OCIE discovered the following deficiencies in this regard:
 
  • Access persons not identified
  • Codes of ethics missing required information
  • Untimely submission of transactions and holdings
  • No description of code of ethics in Form ADVs
 
The Books and Records Rule requires advisers to make and keep certain books and records relating to their investment advisory business, including typical accounting and other business records as required by the Commission. Examples of deficiencies found by the SEC relating to the rule included:
 
  • Lack of maintenance of required records
  • Inaccurate or outdated books and records
  • Inconsistent recordkeeping
 
To view the complete alert issued by the OCIE, click here.
 
What Does CohnReznick Think?
 
Investment advisers should use the findings revealed in the SEC’s recent alert to assess their own practices and procedures, with the goal to recognize where compliance gaps may occur and continually improve their compliance programs.
 
Contact
 
For further information on maintaining SEC compliance, please contact Jay Levy, Partner and Financial Services Industry Practice Leader, at 646-254-7412, Jay.Levy@cohnreznick.com, or William Pidgeon, Partner, at 973-403-7998 or William.Pidgeon@cohnreznick.com.
 
To learn more about CohnReznick’s Financial Services Industry Practice, visit our website.
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