SEC OCIE observations from consultant exams under the multi-branch initiative
On November 9, 2020, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) issued a risk warning describing staff observations from its “Multi-Branch Initiative,” a series of investment adviser reviews SEC registered with geographically dispersed operations and numerous branches that have focused on compliance and supervisory practices for advisory staff operating within corporate branches.
Deficiencies noted by the OCIE included the following:
Inaccurate, inconsistently applied and / or poorly implemented compliance programs. Compliance policies and procedures were: inaccurate because they included outdated information; not applied consistently across all branches; implemented inadequately because, among other things, the compliance function has not received the required records; and / or have not been applied.
Absence of policies and procedures relating to the custody of customer assets. Involuntary custody of client assets attributable to various practices, such as (1) mixing the assets of consultants with those of his clients, (2) receiving client checks in branches and depositing them with client custodians, and
Absence of policies and procedures relating to the invoicing practices of the fees. Lack of policies and procedures, or failure to enforce policies and procedures, to identify and remedy cases where undeclared commissions have been charged to clients and failure to exercise sufficient oversight of commission billing processes, resulting in overcharging.
Inadequate disclosure on conflict of interest. Failure to fully and fairly disclose conflicts of interest, such as those relating to (1) spending appropriations that appeared to benefit proprietary fund clients over non-proprietary fund clients and (2) financial incentives for firms and / or their supervised entities to recommend specific investments.
Lack of supervision and supervision of the people checked. missed
(1) disclose material information (e.g. disciplinary events of supervised entities), (2) oversee portfolio management recommendations (e.g. share class recommendations of mutual funds not in the best interest of the client) and (3) apply best-deal trading and execution policies and procedures (for example, lack of documentation demonstrating the advisors’ analysis of how best execution was achieved).
Advertising deficiencies. Troublesome practices related to materials prepared by supervised individuals located in branches and / or supervised individuals operating under a name other than the consultant’s primary name and specifically included (1) performance presentations that omitted material information, (2) superlatives or unsupported claims , (3) professional experience and / or credentials of falsely claimed supervisors and (4) rankings or acknowledgments of third parties who have omitted material facts.
Shortcomings of the code of ethics. Failure to (1) comply with reporting requirements, (2) review of transactions and investment reports, (3) correct identification of access persons, or (4) include all required provisions in the code of ethics.
The OCIE noted that some consultants have adopted and implemented written compliance policies and procedures that (1) were applicable to all office locations and to all supervised persons, regardless of whether these individuals were independent contractors or employees of the consultant, (2) include unique aspects associated with individual branches, and (3) specifically address the compliance practices necessary for effective branch oversight.
The OCIE also reported that some consultants have performed regular compliance testing or reviews of key activities at all branches at least annually, with some companies conducting reviews more frequently. The OCIE also highlighted that some consultants have established compliance policies and procedures to verify the presence of previous disciplinary events when hiring supervised individuals and periodically confirm the accuracy of disclosure of such information. The OCIE noted that some consultants required compliance training for branch employees.
In sharing its observations, the OCIE encouraged consultants to consider the unique risks presented by operating numerous geographically dispersed branches and to adopt policies and procedures to address those particular risks.
Risk warning is available Here.
© 2021 Vedder PriceRevision of National Law, Volume X, Issue 339