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The Five Most Frequent Compliance Topics Identified in SEC Examinations of Investment Advisors

The Office of Compliance Inspections and Examinations (“OCIE”) at the Securities and Exchange Commission (“SEC”) recently published a Risk Alert titled The Five Most Frequent Compliance Topics Identified in OCIE Examinations of Investment AdvisorsThe five common deficiencies identified in the Risk Alert are compliance procedure; regulatory filings; the custody rule; code of ethics rules; and books and records. The OCIE hopes that in releasing the information, it will help advisors in their future compliance reviews.

Compliance RuleThe Compliance Rule requires advisors to adopt and implement written policies and procedures designed to prevent violations of the Investment Advisers Act of 1940 (“Advisers Act”).  Advisors often fall short in reviews when their compliance manuals are not reviewed annually. This is because the information is no longer current and/or the compliance manuals are not reasonably tailored to the advisor’s business practices.

Regulatory Filings Advisors are required to keep timely and accurate filings with the SEC. However, despite their obligations, advisors frequently fail to timely file complete Form ADV’s, Form PF filings and Form D filings. Furthermore, members of the OCIE observed that advisors frequently made inaccurate disclosures in Form ADV Part 1A or Form ADV Part 2A brochures.

The Custody Rule Advisors with custody of customers’ cash or securities must comply with the Custody Rule of the Advisers Act, which outlines safekeeping requirements for funds and securities within a registered investment advisor’s custody.   Advisors sometimes do not realize they must follow the Custody Rule if they maintain online access to their customers’ accounts. The OCIE additionally observed that advisors with custody obtained surprise examinations that did not meet the requirements of the Custody Rule – i.e., examinations were not conducted on a “surprise” basis.

Code of Ethics The Code of Ethics Rule requires advisors to maintain a code of ethics.   According to the OCIE, typical deficiencies include: advisors not identifying all their “access persons” (supervised persons who have access to nonpublic information about advisory clients’ purchase or sale of securities or are involved in or have access to securities recommendations made to clients); advisors failing to report their personal securities transactions; advisors making untimely reports; and advisors leaving out the description of the code of ethics in their Form ADV Part 2A brochure.

Books and Records Rule The Books and Records Rule requires advisors to make and keep certain books and records relating to their investment strategy.  The deficiencies that the OCIE highlighted relating to this rule are: the failure to maintain records; inconsistent record keeping; and inaccurate or not updated records.

In sharing this information, the OCIE and Lewitas Hyman PC hope to encourage advisors to review and update their practices, policies, and procedures.  Click here to view the full Risk Alert and contact us with any questions.