SEC Flags Multi-Branch Office Compliance for RIAs
The SEC’s Office of Compliance Inspections and Examinations (OCIE) recently published an alert summarizing its exams of investment advisers operating out of multiple locations. The exams focused on fee and expense disclosures to clients, oversight of investment recommendations, and disclosure of conflicts of interest, among other issues, and found a “range of deficiencies.”
The Multi-Branch Initiative focused on three main areas:
– Compliance Programs;
– Supervision Programs and;
– Investment Advice.
The vast majority of the examined advisers were cited for at least one deficiency related to the Compliance Rule. In particular, the staff observed that more than one-half of these advisers had compliance policies and procedures that were:
(1) inaccurate because they included outdated information, such as references to entities no longer in existence and personnel that had changed roles and responsibilities;
(2) not applied consistently in all branch offices;
(3) inadequately implemented because, among other things, the compliance department did not receive records called for in the policies and procedures; or
(4) not enforced
Examples of compliance program-related shortcomings also included custody of client assets. Advisers did not have policies and procedures that limited the ability of supervised persons to process withdrawals and deposits in client accounts, change client addresses of record, or do both. Another area of focus was fees and expenses. Advisers did not have policies and procedures that included identifying and remediating instances where undisclosed fees were charged to clients.
Supervision deficiencies related to:
(1) the failure to disclose material information, including disciplinary events of supervised persons;
(2) portfolio management, such as the recommendation of mutual fund share classes that were not in the client’s best interest; and
(3) trading and best execution, including enforcing policies and procedures the adviser had in place.
Advisers additionally often had deficiencies related to advertising, specifically in relations to (1) performance presentations that omitted material disclosures; (2) superlatives or unsupported claims; (3) professional experience and/or credentials of supervised persons or the advisory firm that were falsely stated; and (4) third-party rankings or awards that omitted material facts regarding these accolades.
More than one-half of the examined advisers were cited for deficiencies related to portfolio management practices. These often were related to:
(1) oversight of investment decisions, including the oversight of investment decisions occurring within branch offices (often related to mutual fund share class selection practices and disclosures associated with wrap fee programs);
(2) disclosure of conflicts of interest (such as expense allocations that appeared to benefit proprietary fund clients over non-proprietary fund clients. Several advisers also did not fully and fairly disclose financial incentives for the advisers and/or their supervised persons to recommend specific investments); and
(3) trading allocation decisions (Advisers were cited for the lack of documentation demonstrating the advisers’ analysis regarding obtaining best execution for their clients and completing principal transactions involving securities sold from the firms’ inventory without prior client consent)
In sharing this information, the OCIE encourages advisers, when designing and implementing their compliance and supervision frameworks, to consider the unique risks and challenges presented when employing a business model that includes numerous branch offices and business operations that are geographically dispersed and to adopt policies and procedures to address those risks and challenges.