November 30, 2020

Volume X, Number 335


OCIE Report Uncovers Repeated Compliance Issues At Advisers' Branch Offices

The Office of Compliance, Inspections and Examinations (“OCIE”) of the U.S. Securities and Exchange Commission (“SEC”) recently issued a report regarding its findings from examinations conducted during 2016-2018 of registered investment advisers who have operations in numerous branch offices that are not located in their main office.  The report urges investment advisers to review their compliance procedures for inconsistencies between the main and branch offices and to set forth a uniform compliance framework across the branch locations as well as the main office.     

The findings of the report state that OCIE focused on “main and branch office practices for : (1) compliance with certain rules, such as the ‘Code of Ethics Rule’ and ‘Custody Rule’, and (2) consistency with fiduciary obligations, such as those related to fees, expenses and advertising”.  In doing so, OCIE observed particular risks to address in creating compliance programs, as well as supervision models, which potentially occur in branch offices.  Most of these risks arise when the branch offices and their personnel, which are dispersed geographically from the main office, “develop different practices or disparate ways of communicating” within the branch offices, as well as with the main office.

The report also indicates that “the vast majority of the examined advisers were cited for at least one deficiency related to the Compliance Rule”.  The “Compliance Rule” requires investment advisers to establish written policies and procedures that are reasonably designed to detect and prevent violations of the Investment Advisers Act by investment advisers and their supervised employees.  The examinations found that over one-half of all advisers examined had compliance policies and procedures that were: (1) inaccurate because they included outdated information; (2) not applied consistently in all branch offices; (3) inadequately implemented because the compliance department did not receive the records called for in the policies and procedures; or (4) the policies and procedures were not enforced.  The report indicates that these issues “often were related to the advisers failing to recognize that they had custody of client assets, failing to adequately implement and oversee their billing practices, or both”.  OCIE also found repeated deficiencies regarding portfolio management related to oversight of investment decisions, disclosure of conflicts of interest and allocation of trades.

The report offers observed practices that would improve compliance and supervision of branch offices, including the application of the same policies and procedures across all office locations and all supervised persons.  However, some policies and procedures could include additional and specific matters tailored to individual branches and their particular oversight.  The complete report from OCIE can be found here.

©1994-2020 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.National Law Review, Volume X, Number 325



About this Author

David L. Ward Member Securities Litigation White Collar Defense & Government Investigations Complex Commercial Litigation Arbitration, Mediation, ADR

David Ward focuses his practice on financial services regulatory matters, internal investigations and related litigation. He represents financial services clients throughout the United States, including broker-dealers, investment advisors, banks, pension consultants, insurance companies and publicly traded entities before the SEC, FINRA, CFTC, U.S. Department of Justice and state regulators. David regularly assists clients in internal investigations; the defense of regulatory investigations, sales practice issues, corporate governance matters and securities-related litigation in state and...