October 24, 2021

Volume XI, Number 297


October 22, 2021

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OCIE Risk Alert Highlights Compliance Rule Deficiencies Observed During Recent Adviser Exams

On November 19, 2020, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert summarizing common deficiencies related to registered investment adviser compliance programs identified by OCIE staff during recent adviser exams. Rule 206(4)-7 of the Advisers Act—the Compliance Rule—requires registered investment advisers to adopt written policies and procedures designed to prevent violations of the Advisers Act, review the adequacy and effectiveness of such policies and procedures no less frequently than annually and appoint a chief compliance officer (CCO) empowered to administer the compliance program.

OCIE identified the following categories of Compliance Rule deficiencies and weaknesses:

  • Inadequate Compliance Resources. Failure to devote adequate resources, such as information technology, staff and training, to compliance programs, including, for example, by (1) allowing or directing CCOs to assume various other professional responsibilities, leaving CCOs with insufficient time to devote to their compliance oversight responsibilities and/or to develop their knowledge of the Advisers Act; and (2) not hiring additional compliance staff or enhancing information technology capabilities despite having experienced significant growth in the firm’s size or complexity, leading to compliance program implementation failures;

  • Insufficient Authority of CCOs. Failure to empower CCOs to develop and enforce compliance programs, including, for example, by (1) restricting CCOs’ access to critical compliance information, such as trading exception reports and advisory agreements with key clients; (2) not consulting CCOs regarding matters that had potential compliance implications; and (3) not prioritizing senior management engagement with CCOs, leading to CCOs having limited knowledge about the firm’s leadership, strategy, transactions, and business operations;

  • Annual Review Deficiencies. Inability to demonstrate that an annual review was performed or annual reviews that failed to identify significant existing compliance or regulatory problems, including, for example, by (1) failing to identify or review key risk areas applicable to the adviser, such as conflicts and protection of client assets; and (2) failing to review significant areas of the adviser’s business, such as policies and procedures concerning cybersecurity and the calculation of fees and allocation of expenses;

  • No Implementation of Compliance Program. Failure to implement or perform actions required by written policies and procedures, including, for example, by failing to (1) train employees; (2) implement compliance procedures regarding trade errors, advertising, best execution, conflicts, disclosure and other requirements; (3) review advertising materials; (4) follow compliance checklists and other processes, including backtesting fee calculations and testing business continuity plans; and (5) review client accounts, e.g., to assess consistency of portfolios with clients’ investment objectives, on a periodic basis or on a schedule required in the adviser’s policies;

  • Inaccurate and Incomplete Information in Policies and Procedures. Inclusion of outdated or inaccurate information about the adviser in policies and procedures, including through the use of off-the-shelf policies;

  • Insufficient Policies and Procedures. Failure to maintain, establish or implement appropriately tailored written policies and procedures reasonably designed to prevent violations of the Advisers Act, including, for example, by (1) claiming to rely on cursory or informal processes instead of maintaining written policies and procedures; and (2) using policies of an affiliated entity, such as a broker-dealer, that were not tailored to the adviser’s business.

OCIE encourages advisers to review their written policies and procedures, including implementation of those policies and procedures, to ensure that they are tailored to the advisers’ business and adequately reviewed and implemented.

The Risk Alert is available here.

© 2021 Vedder PriceNational Law Review, Volume XI, Number 33

About this Author

John Marten Investment Attorney Vedder Price Law FIrm

John S. Marten, a Shareholder in the Chicago office of Vedder Price, has substantial experience representing clients in the investment management industry.

As a member of the firm’s Investment Services group, Mr. Marten counsels clients on a wide variety of matters involving the application of the federal securities laws to investment companies, investment advisers and broker-dealers. He has significant experience counseling investment company clients with respect to new products and was recently involved in the creation of two mutual funds...

(312) 609 7753
Nathaniel Segal Investment Attorney Vedder Price Law Firm

Nathaniel Segal is counsel at Vedder Price and a member of the Investment Services group. He focuses his practice on investment companies and investment advisers in connection with the organization and operation of investment products and services, including traditional mutual funds, closed-end investment companies (including interval funds and listed closed-end funds), variable insurance products and registered hedge funds, as well as mutual funds utilizing complex hedging and absolute return strategies. Mr. Segal has experience in conducting transactional due diligence...

(312) 609 7747
Jacob Tiedt,Vedder Price law firm investment services attorney

Jacob C. Tiedt is a Shareholder at Vedder Price and a member of the Investment Services group.

Mr. Tiedt’s practice includes the representation of registered mutual funds, closed-end funds and exchange-traded funds; private funds; investment advisers; and other financial institutions on a broad range of regulatory, governance and compliance matters. Mr. Tiedt regularly counsels clients on matters relating to SEC registration, disclosure and compliance; shareholder solicitation; NYSE, Nasdaq and FINRA regulation; corporate governance; and board administration. Mr....

Adam Goldman Investment Attorney Vedder Price

Adam S. Goldman is an Associate in the Chicago office of Vedder Price and a member of the firm’s Investment Services practice group.

Prior to joining Vedder Price, Mr. Goldman practiced at a boutique financial services firm, representing broker-dealers, investment advisers, commodity pool operators, private equity funds, and other investment services clients in transactional, litigation, and compliance matters. Mr. Goldman also counseled public companies on required filings under the 1933 and 1934 Acts and other regulatory issues.

While in law school, Mr. Goldman competed in...

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