Securities Regulation Daily OCIE’s Multi-Branch Initiative uncovers compliance and supervisory deficiencies
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Tuesday, November 10, 2020

OCIE’s Multi-Branch Initiative uncovers compliance and supervisory deficiencies

By Anne Sherry, J.D.

An examination of nearly 40 investment advisers and their branch offices revealed that policies and procedures often fail to respond to the unique challenges of operating from geographically diverse locations.

The SEC’s Office of Compliance Inspections and Examinations released a risk alert detailing its observations from the Multi-Branch Initiative, a series of examinations of investment advisers operating from geographically dispersed locations. OCIE looked at 40 advisers, most of which had at least 10 branch offices, and found that some had not fully implemented policies and procedures addressing activities occurring in geographically dispersed operations. The Initiative particularly focused on two areas: compliance programs and supervision and investment advice.

Compliance and supervision. According to the risk alert, OCIE cited the "vast majority" of advisers for at least one deficiency related to Investment Advisers Act Rule 206(4)-7 (the "Compliance Rule"). More than half of advisers’ policies and procedures were outdated, inconsistently applied, inadequately implemented, or not enforced. Often, advisers failed to recognize that they had custody of client assets and/or failed to adequately implement and oversee their fee billing practices, leading to overcharging.

OCIE also found supervision deficiencies related to portfolio management, trading and best execution, and the failure to disclose disciplinary actions or other material information. Advisers also had deficiencies related to advertising: presentations omitting material disclosures, unsupported claims or superlatives, falsely stated professional experience and credentials, and third-party rankings or awards that omitted material facts.

Several advisers were cited for code of ethics deficiencies. These advisers failed to comply with reporting requirements, review transactions and holding reports, properly identify access persons, or include all required provisions in their codes of ethics. For example, some codes of ethics omitted the review and approval process required before supervised persons could invest in limited or private offerings. Codes also omitted initial and annual holdings report submissions and/or quarterly transaction report submissions.

Investment advice. OCIE also cited more than half the examined advisers for deficiencies related to portfolio management. Many of these involved oversight of investment decisions. Here, staff identified issues with mutual fund share class selection and disclosure; wrap fee programs; and rebalancing. Several advisers did not fully and fairly disclose conflicts of interest or financial incentives. In other cases, advisers were cited for the lack of documentation demonstrating their best-execution analysis; completing principal transactions from the firms’ inventory without prior client consent; and inadequately monitoring supervised persons’ trading.

Staff observations. On the plus side, OCIE staff identified some compliance-promoting practices that firms may wish to borrow for their oversight efforts. Some advisers adopted and implemented policies and procedures applicable to all office locations and all supervised persons, whether employees or independent contractors. The policies and procedures in some cases included aspects associated with individual branch offices. They also specifically addressed compliance practices necessary for the effective oversight of branch offices.

Advisory firms reviewed key activities at branch offices at least annually, including validating that branch offices undertook reviews of their own portfolio management decisions, designating individuals within branch offices to provide portfolio management monitoring, consolidating trading activities at branch offices into the advisers’ overall testing, and conducting compliance reviews that did not solely rely on self-reporting. Advisers also established compliance policies and procedures to check for prior disciplinary events when hiring supervised persons and periodically reviewing disciplinary histories. Finally, most advisers required compliance training for branch office employees, tailoring the training to the areas identified on branch office reviews as needing improvement.

OCIE said that in response to the staff’s observations, advisers amended disclosures, revised policies and procedures, and changed certain practices. OCIE encourages advisers to keep in mind the unique risks and challenges inherent in geographically dispersed operations when designing and implementing compliance and supervision frameworks.

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