OCIE Shares Observations from Adviser Examinations under its Multi-Branch Initiative
On November 9, 2020, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert describing the staff’s observations from its “Multi-Branch Initiative”—a series of examinations of SEC-registered investment advisers with geographically dispersed operations and numerous branch offices that focused on the compliance and supervisory practices for advisory personnel working within the firms’ branch offices.
The deficiencies observed by OCIE included the following:
Inaccurate, inconsistently applied and/or inadequately implemented compliance programs. Compliance policies and procedures were: inaccurate because they included outdated information; not applied consistently in all branch offices; inadequately implemented because, among other things, the compliance department did not receive required records; and/or were not enforced.
Absence of policies and procedures relating to custody of client assets. Inadvertent custody of client assets attributable to various practices, such as by (1) commingling adviser assets with those of its clients, (2) receiving client checks in branch offices and depositing these checks with client custodians and
Absence of policies and procedures relating to fee billing practices. Absence of policies and procedures—or failure to enforce policies and procedures—to identify and remediate instances in which undisclosed fees were charged to clients and failure to exercise sufficient oversight over fee billing processes, resulting in overcharges.
Inadequate conflict of interest disclosures. Failure to fully and fairly disclose conflicts of interest, such as those relating to (1) expense allocations that appeared to benefit proprietary fund clients over non-proprietary fund clients and (2) financial incentives for firms and/or their supervised persons to recommend specific investments.
Deficient oversight and supervision of supervised persons. Failure to
(1) disclose material information (e.g., disciplinary events of supervised persons), (2) supervise portfolio management recommendations (e.g., mutual fund share class recommendations not in client’s best interests), and (3) enforce trading and best execution policies and procedures (e.g., lack of documentation demonstrating advisers’ analysis as to how best execution was obtained).
Advertising deficiencies. Problematic practices related to materials prepared by supervised persons located in branch offices and/or supervised persons operating under a different name than the adviser’s primary name and specifically included (1) performance presentations that omitted material disclosures, (2) superlatives or unsupported claims, (3) falsely stated professional experience and/or credentials of supervised persons, and (4) third-party rankings or awards that omitted material facts.
Code of ethics deficiencies. Failure to (1) comply with reporting requirements, (2) review transactions and holdings reports, (3) properly identify access persons or (4) include all required provisions in the code of ethics.
OCIE noted that certain advisers adopted and implemented written compliance policies and procedures that (1) were applicable to all office locations and all supervised persons—regardless of whether these individuals were independent contractors or employees of the adviser, (2) include unique aspects associated with individual branch offices and (3) specifically address compliance practices necessary for effective branch office oversight.
OCIE also reported that certain advisers performed compliance testing or periodic reviews of key activities at all branch offices at least annually, with some firms conducting reviews more frequently. OCIE also highlighted that certain advisers established compliance policies and procedures to check for prior disciplinary events when hiring supervised persons and periodically confirming the accuracy of disclosure regarding such information. OCIE noted that certain advisers required compliance training for branch office employees.
In sharing its observations, OCIE encouraged advisers to consider the unique risks presented from operating numerous geographically dispersed branch offices and to adopt policies and procedures to address those particular risks.
The Risk Alert is available here.