Investment Companies Advisor: Common Findings of SEC Examinations

Each year, the Office of Compliance Inspections and Examinations (“OCIE”) conducts examinations of thousands of investment advisers and broker-dealers for compliance with the Investment Advisers Act of 1940 (the “Advisers Act”). Below, grouped by topic, are the most common deficiencies that have been identified by the OCIE.

Compliance Rule

The Compliance Rule makes it unlawful for an investment adviser to provide investment advice to clients unless the adviser adopts and implements certain written policies and procedures to prevent violation of the Advisers Act and reviews those policies at least annually. The most common deficiencies identified related to the Compliance Rule are as follows:

  • Compliance manuals are not current or documented in writing
  • Compliance manuals are not reasonably tailored to the adviser’s business practices
  • Annual reviews are not performed or did not address the adequacy of the adviser’s policies and procedures
  • Adviser did not follow compliance policies and procedures

Regulatory Filings

Advisers are obligated to accurately complete and timely file certain regulatory filings with the Commission. The most common deficiencies identified related to regulatory filings are as follows:

  • Inaccurate disclosures
  • Untimely amendments to Form ADV
  • Incorrect and untimely Form PF and Form D filings

Custody Rule

Advisers with custody of client cash or securities must comply with the Custody Rule. The most common deficiencies identified related to the Custody Rule are as follows:

  • Advisers with custody of client cash and securities obtained surprise examinations that did not meet the requirements of the Custody Rule
  • Advisers did not recognize that they may have custody of client cash and securities as a result of having certain authority over client accounts, including online access to client accounts

Code of Ethics Rule

The Code of Ethics Rule requires an adviser to adopt and maintain a code of ethics. The most common deficiencies identified related to the Code of Ethics Rule are as follows:

  • Codes of ethics missing required information
  • Untimely submission of transactions and holdings
  • No description of code of ethics in Form ADV

Books and Records Rule

The Books and Records Rule requires advisers to create and maintain certain books and records relating to their investment advisory business. The most common deficiencies identified related to the Books and Records Rule are as follows:

  • Did not maintain all required records
  • Books and records are inaccurate or not updated
  • Inconsistent recordkeeping

Compliance Issues Related to Best Execution

As a fiduciary, an adviser must execute securities transactions for clients in such a manner that the client’s total costs or proceeds in each transaction are the most favorable under the circumstances. The most common deficiencies related to best execution obligations are as follows:

  • Not performing best execution reviews
  • Not considering materially relevant factors during best execution reviews
  • Not seeking comparisons from other broker-dealers
  • Not fully disclosing best execution practices in Form ADV
  • Not disclosing soft dollar arrangements in Form ADV
  • Inadequate policies and procedures related to best execution

Most Frequent Compliance Issues Related to Advisory Fees and Expenses

Advisers must adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act that pertain to advisory fees and expenses. The most common deficiencies identified related to advisory fees and expenses are as follows:

  • Fee-billing based on incorrect account valuations
  • Billing fees in advance or with improper frequency
  • Applying incorrect fee rate
  • Omitting rebates and applying discounts incorrectly
  • Disclosure issues involving advisory fees
  • Adviser expense misallocations

We Can Help

We are ready to answer your questions and provide the resources that you need.  In the meantime, if you have questions, please contact your Elliott Davis Advisor or our investment Companies Practice Leader, Renee Ford.

Resources:

https://www.sec.gov/ocie

https://www.sec.gov/ocie/Article/risk-alert-5-most-frequent-ia-compliance-topics.pdf

https://www.sec.gov/files/ocie-risk-alert-advisory-fee-expense-compliance.pdf

https://www.sec.gov/ocie/announcement/risk-alert-most-frequent-best-execution-issues-cited-adviser-exams-1