Compliance Rule

Growing RIAs Beware: SEC Issues Risk Alert Relating to Compliance Rule Failures

December 15, 2020 | Steve Parker

In conjunction with a speech delivered by its Director last month, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert discussing significant compliance deficiencies its examination staff had identified relating to Investment Advisers Act Rule 206(4)-7 (the “Compliance Rule”). The alert followed on the heels of prior Risk Alerts that addressed Compliance Rule deficiencies, among others, as having been the frequent subject of compliance-related findings by OCIE staff. Many of the deficiencies discussed in the Risk Alert are particularly relevant to growing RIAs who are attempting to assure that their compliance programs evolve and improve as they continue their growth.

The Compliance Rule requires, among other things, that RIAs must design, adopt and put into place written procedures and policies designed to prevent and detect violation of the Advisers Act and its rules. The Compliance Rule also requires the RIA to review the adequacy of those procedures annually. It also requires the RIA to appoint a competent Chief Compliance Officer who is empowered with the responsibility to develop and enforce policies that are appropriate to the firm.

The Risk Alert listed many examples of the types of deficiencies noted during examinations, including inadequate allocation of compliance resources. As we have discussed before, an RIA must assure that the CCO has sufficient time and resources to do the job. This means, for many small and growing RIAs, that the CCO’s compliance role should be exclusive and noncompliance tasks should be reallocated to other employees. There is no prohibition on the CCO having other roles within the organization, but where there are compliance deficiencies, the inability of a CCO to commit sufficient time to compliance will usually be cited as a structural deficiency. The CCO must be permitted, if not encouraged, to obtain additional training and to hire extra compliance staff when needed. Outside consultants or law firms are encouraged when necessary to enable the firm to meet its compliance obligations.

Advisers Encouraged to Assess Use of New Electronic Messaging Technologies as part of Annual Compliance Review Process

March 13, 2019 | Parker MacIntyre

With annual compliance reviews in full swing this time of year, we write today to remind advisory firms to be sure to assess the sufficiency of their policies and procedures in the ever-developing area of electronic messaging. Our note comes on the heels of a recent Risk Alert on this topic issued by the SEC’s Office of Compliance Inspections and Examinations or “OCIE,” which exhorts advisory firms to take a fresh look at their current compliance policies in light of the particular risks of non-compliance posed by the firm’s usage of electronic messaging.

“Electronic messaging,” as discussed in OCIE’s Risk Alert, refers to such mediums as text/SMS messaging, instant messaging, personal email, and personal or private messaging, but specifically excludes firm-wide email. Notably, OCIE’s exclusion of firm email from analysis in the Risk Alert should not be read as diminishing an adviser’s compliance obligations to capture, store, and periodically review firm email communications. Rather, as OCIE explains, “firms have had decades of experience complying with regulatory requirements with respect to firm email” and it is not as problematic from a compliance standpoint as compared to some of the newer technologies that run on third-party applications or platforms. Continue reading ›

SEC Identifies the Five Most Frequent Examination Issues for Investment Advisers

March 2, 2017 | Elizabeth Dalziel

On February 7, 2017, the Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) released a list of five compliance topics that are the most commonly identified topics “in deficiency letters that were sent to SEC-registered investment advisers.” OCIE published this list in a National Exam Program Risk Alert in order to help advisers who are conducting their annual compliance reviews.

The first compliance topic was compliance with the Compliance Rule, Rule 206(4)-7, which requires an investment adviser to create and execute written policies and procedures that are reasonably tailored to prevent the investment adviser and its supervised persons from violating the Advisers Act and to detect potential violations. The rule also requires an investment adviser to review the sufficiency of its policies and procedures at least annually and to appoint a chief compliance officer. According to OCIE, common violations of the Compliance Rule include not having a compliance manual that is reasonably suited to the adviser’s method of doing business, failure to conduct annual reviews or annual reviews that did not cover the sufficiency of the investment adviser’s policies and procedures, failure to follow policies and procedures, and compliance manuals that are outdated.

The second topic that OCIE identified was compliance with the Advisers’ Acts rules on regulatory filings. For example, Rule 204-1 provides that investment advisers must make amendments to their Form ADV on at least an annual basis, and the amendments must be made “within 90 days of the end of their fiscal year and more frequently, if required by the instructions to Form ADV.” For investment advisers to private funds, Rule 204(b)-1 provides that an investment adviser must file a Form PF if the investment adviser is advising a private fund or fund with assets of $150 million or more. Finally, Rule 503 of Regulation D of the Securities Act of 1933 provides that issuers of private funds must file a Form D, and investment advisers usually file the Form D for their private fund clients. OCIE determined that the most frequent violations of these rules were inaccurate disclosures on Form ADV Part 1 or Part 2A, late modifications to Form ADVs, faulty and late Form PF filings, and faulty and late Form D filings.