Episode 54: OCIE Risk Alert Part 2

On Episode 54 Part 2, we continue discussing the recent OCIE Risk Alert. 



CCO Buzz: Hello and welcome back to the Buzz. If you tuned in for the last episode, you know we’re covering the OCIE Risk Alert, “Observation from Examination of Investment Advisers: Compliance, Supervision, and Disclosure of Conflicts of Interest.” Let’s join President Tito Pombra for Part 2 of Episode 54.

Reporting is a big aspect of this Risk Alert, what are some examples of disciplinary events that should be reported?

Tito Pombra: Firms and their CCO’s would hope that any questionable events that warrant reporting would be reported. Within this Risk Alert, we have found that to not be the case when it comes to rogue brokers, due to the SEC sending deficiency letters to nearly every advisory firm, of the 50 RIAs reviewed in 2017.

OCIE found many of those firms provided inadequate records regarding violations by their advisors as well as insufficient policies and procedures on disciplinary records, which warrants the SEC’s increased attention on the oversight.

A few examples of oversight weakness are, but not limited to:

• Fee Disclosures;
• Opening Accounts that were inappropriate for investors;
• Undisclosed compensation agreements that “could have impacted the impartiality of the advice their supervised persons gave to their clients;” and
• Using unapproved advertising materials – to name a few.

CCO Buzz: Alright, understanding that addressing oversight is key when firms are designing and implementing their compliance and supervision frameworks, what are some of the disclosure requirements for firms to consider?

Tito Pombra: According to the Risk Alert, OCIE encourages advisers to consider the risks presented by, and the disclosure requirements triggered by, the hiring and employing of individuals with disciplinary histories.

Firms should already be aware of the disclosure in Form ADV Part 2B (and) other client presentations, brochures (and) marketing materials, but within the onboarding process firms should be highly aware of the disclosure of conflicts of interests in regard to supervised persons with disciplinary histories.

Case in point when it comes to compensation agreements. Within the Risk Alert, it was noted that serval advisers had undisclosed compensation arrangements resulting in the conflict of interest.
For example, forgivable loans – if made to advisers or more importantly their supervised persons, the terms made are often reliant on client-based incentives. Those incentives may have influenced the decision – which could in turn, result in higher fees and expenses.

Alongside that, supervised persons and their firms are required to absorb all transaction-based fees when executing client transactions, which could have also incentivized supervised persons to trade less frequently on behalf of their clients.

CCOs and their firms will need to implement additional or enhance the policies and procedures to supervise employees with similar disclosure issues.

CCO Buzz: For those listening in, what do you think the biggest take-away from this risk alert should be?

Tito Pombra: Like any OCIE issued Risk Alert, I encourage our listeners to take a moment to review all of your disclosures and update them regularly. This time around CCOs and their compliance departments may want to focus more specifically around employees with disciplinary actions, fees and conflicts. But overall, I believe firms should take time regularly to review all areas within their compliance program to improve their own oversight initiatives.
Ask yourself and your firm…

• Have you completed your annual review or completed a risk assessment?
• Has your compliance and HR department met in regard to developing a plan to address the items in this Risk Alert?
• And if not, how (and when) will you address this as your firm approaches year-end?
• If you have any questions or concerns, regarding the OCIE’s Alert or compliance issue, please contact us at www.corecls.com or call us at (619) 278-0020. The team at Core Compliance is here to help and our team of former in-house compliance officers and CCO’s can help you address any concerns regarding this Risk Alert or any issues within your compliance program.

CCO Buzz: Well that’s it for this week’s episode. If you’d like additional information, please check out our website at www.corecls.com. You can also follow us on Facebook, LinkedIn, or Twitter @CoreCls. Thank you, and we hope you tune-in to next week’s episode of the CCO Buzz.