Preparing for SEC Exams: Top Five Identified Deficiencies by the OCIE

In February 2017, the Securities and Exchange Commission (“SEC”) published a Risk Alert highlighting the top five most common compliance topics identified in deficiency letters issued to SEC registered investment advisers (“RIA”).

Below is a list of topics and examples of deficiencies noted:

  • Rule 206(4)-7 (the “Compliance Rule”) under the Investment Advisers Act of 1940 (the “Advisers Act”). Deficiencies associated with this rule include compliance manuals that have not been reasonably tailored to the adviser’s business practices, annual reviews that did not address the adequacy of the adviser’s policies and procedures (or refraining from doing annual reviews altogether), advisers who did not follow compliance policies and procedures, and compliance manuals that were not up to date.
  • Required regulatory filings. The SEC has found several weaknesses, such as inaccurate disclosures, untimely amendments to Form ADVs, and incorrect and untimely Form PF and Form D filings.
  • Rule 206(4)-2 under the Advisers Act (the “Custody Rule”). Advisers who experienced deficiencies associated with this rule included those who: (i) did not recognize that they had custody due to online access to client accounts, (ii) had custody and obtained surprise examinations that did not meet the requirements of the Custody Rule, and (iii) did not recognize that they had custody as a result of certain authority over client accounts.
  • Rule 204A-1 under the Advisers Act (the “Code of Ethics Rule”). Deficiencies pertaining to this rule included access to persons who were unidentified by the advisers (for the purpose of reviewing personal securities transactions), codes of ethics that were missing required information, untimely submissions of transactions and holdings, and codes of ethics that did not have any descriptions in the Form ADVs.
  • Rule 204-2 under the Advisers Act (the “Books and Records Rule”). Some of the main weaknesses under this rule included inconsistent recordkeeping, books and records that were inaccurate or not updated, and records such as trade records, advisory agreements, and general ledgers that were not maintained properly.

The SEC released the February Risk Alert with the intent to help advisers identify and address potential deficiencies.

If you need assistance with assessing your compliance program, Core Compliance can help. We offer a variety of investment advisory services to help you identify and resolve any deficiencies, including Annual Reviews and filing Forms ADV Part 1 and 2. Don’t wait for an SEC order, give us a call today at (619) 278-0020 to schedule a consultation.

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