RIA Compliance Blog
Late last year, the SEC’s Office of Compliance Inspections and Examinations (OCIE), now known as the Division of Examinations, issued a compliance risk alert warning investment advisers to ensure that their compliance programs are uniform and are uniformly applied across all branch office locations.
The alert summarized the findings from OCIE’s two-year Multi-Branch Initiative, in which it examined nearly 40 advisers’ main offices and their respective branches. Most of the advisers included in the initiative had 10 or more branches that were widely dispersed from the main office. Primarily, the report emphasized that compliance risks relating to supervising personnel and processes are heightened when the branch office has policies or procedures that differ from those of the main office.
In the report, OCIE further explains that more than half of the examined firms had policies and procedures that were either inaccurate or not consistently applied among branches, or both. Almost all firms had at least one compliance defect. Many of the deficiencies related to unrecognized custody of client funds, inadequate or inconsistent fee billing practices, failure to recognize and disclose conflicts of interests, or differences in portfolio management practices or other ways in which the firm’s advisers formulate or deliver investment advice.
The branches of some of the examined advisers had custody of client assets because of practices such as commingling branch assets with client assets, serving as trustees or general partners for trust and/or partnership clients, and other similar reasons. Although the firms typically had policies requiring the custody rule to be followed in these circumstances, the firm was not complying with the rule because the circumstances existing at the branch that created the custody went unrecognized due to lax supervisory practices.
The fee billing issues identified included situations in which wrap fees were inconsistently described or charged and breakpoints were inconsistently granted. The latter situation could occur either because the breakpoint was applied inconsistently or because the clients’ accounts were valued using inconsistent methodologies.
In the category of advertising, the alert explains that some advisers had advertising material that originated in the branch office and improperly used DBA names of the branch without including an adequate disclaimer. Other advertising problems included performance claim presentations that lacked necessary disclosures, false claims of experience of credentials of branch personnel, and rankings or awards presented to the branch or an adviser in the branch that omitted material disclaimers.
The report also describes steps that some advisers have taken to mitigate these types of risks. For example, some firms centralized their billing process to eliminate billing practice and fee disclosure variations.
Although the report stressed uniformity as the key to designing effective policies in most instances, OCIE recognized that some firms will have business differences that may warrant developing bespoke policies that apply to a particular branch. What should be avoided, however, are branch practices that have no relevant effective policy, or as to which the firmwide policy is inapplicable or ineffective.
As a result of the risk alert, all RIAs with branch offices should identify unique challenges presented by the operations of its branches, and consider whether branch and main office policies should be harmonized and improved. This can be done either separately or as part of a firm’s Rule 206(4)-7 annual review.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our Investment Adviser Group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our Investment Adviser Practice Group page for more information.