On November 9, 2010, the Securities and Exchange Commission’s Office of Examinations and Inspections released a risk alert titled Observations from OCIE’s Examinations of Investment Advisers: Supervision, Compliance and Multiple Branch Offices.
With focus on compliance programs, supervision, and investment advice, OCIE performed examinations of 40 advisers, targeting the main office of each adviser and at least one branch office.
While OCIE identified poor communication and coordination among staff as a risk to all advisers, they believe advisers with multiple offices are at a particular risk for incongruent and disconnected practices and controls.
These exams yielded common deficiencies in two categories:
1) Compliance programs
- Advisers did not maintain accurate policies and procedures, nor did they consistently implement them across offices, if enforced at all. Further, advisers failed to ensure compliance officers had access to the records required by the policies and procedures.
- Ineffective or nonexistent policies and procedures often resulted in the adviser’s accidental custody of client assets.
- Ineffective or nonexistent policies and procedures allowed advisers to overcharge clients.
- Advisers failed to 1) properly supervise staff; and 2) enforce policies and procedures which allowed best execution violations (i.e. recommending mutual fund class shares against a client’s interest).
- Advisers violated advertising rules, particularly those advisers with supervised persons in separate offices and/or operating under a DBA.
- Advisers failed to implement their adopted code of ethics, and/or did not include the total required elements in their code of ethics.
2) Investment advice
- Across offices, advisers failed to oversee investment decisions, often related to mutual fund class recommendations, wrap fees, and rebalancing.
- Advisers failed to disclose conflicts of interest such as unequal expense allocations and advisers’ financial incentives.
- Trading and allocation of investment opportunities violations included failure to maintain best execution documentation, and insufficient monitoring of supervised persons’ trading.
How Key Bridge Compliance, LLC can help:
Many of Key Bridge’s clients maintain several offices and DBAs, and our team is equipped with the tools and expertise to implement the risk reduction steps recommended by the SEC to multi-branch advisers:
These practices include:
1) Customizing compliance policies and procedures that:
- Address how the firm will effectively oversee all branches; and
- Address the specificities of each office.
2) Performing at minimum annual compliance testing and reviews of each branch office; and
3) Providing adequate compliance training for all employees across branch offices.
Though effective, these steps are complex and time-consuming, even for firms with the most robust compliance departments. Key Bridge’s services encompass the full range of compliance capabilities, whether you need advice on compliance program modifications, or want us to lead this effort as your Chief Compliance Officer.