Focus Perspective: Déjà vu all over again

There we were, last week on July 22, talking about disciplinary history policy, and OCIE’s September 12, 2016 Risk Alert, “Examinations of Supervision Practices at Registered Investment Advisers.” Was the SEC spying on us? Has our email been hacked by the government?

On July 23, 2019 (the next day), OCIE put out a new Risk Alert, “Observations from Examinations of Investment Advisers: Compliance, Supervision, and Disclosures of Conflicts of Interest.”   

2016 Risk Alert

The 2016 Risk Alert stated that, “OCIE is undertaking an initiative to examine the supervision practices and compliance programs of registered investment advisers that employ individuals with a history of disciplinary events in the financial services sector (the “Supervision Initiative”). These examinations will assess such advisers’ business and compliance practices, particularly those practices related to the firms’ supervision of higher-risk individuals.”

The Supervision Initiative would focus on four key risk areas:

  • “Compliance Program. Rule 206(4)-7 under the Advisers Act requires each adviser to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act. Examiners will review the registered adviser’s practices surrounding its hiring processes, ongoing reporting obligations, employee oversight practices, and complaint handling processes. An important component of the examinations is to evaluate whether the advisers foster robust compliance cultures and tone at the top. The tone at the top is critical to setting the ethical environment of the organization and preventing misconduct.
  • Disclosures. As a fiduciary, an investment adviser has a duty to make full and fair disclosure of all material facts. Advisers Act Section 207 provides that, in any registration application or report filed with the Commission under Section 203 or 204, it is unlawful for any person willfully to make any untrue statement of a material fact or willfully to omit to state a material fact which is required to be stated therein. This standard applies to statements made in an adviser’s Form ADV Part 1 and brochure. An adviser must update its brochure at least annually (and more frequently, if required by the instructions to Form ADV) and notify clients of any material changes. Examiners will likely review registered advisers’ practices regarding their disclosures of regulatory, disciplinary, or other actions with a focus on assessing the accuracy, adequacy, and effectiveness of such disclosures.
  • Conflicts of Interest. As a fiduciary, an investment adviser has a duty to make full and fair disclosure of all material facts, including all material conflicts of interest that could affect the advisory relationship. Examiners will assess the conflicts of interest that a registered adviser or supervised person may have. Particular attention will be given to conflicts that may exist with respect to financial arrangements (e.g. unique products, services, or discounts) initiated by supervised persons with disciplinary events.
  • Marketing. Advisers frequently use marketing materials to solicit new clients or retain existing clients. Rule 206(4)-1 under the Advisers Act prohibits an adviser from including certain representations in its advertisements or marketing materials. Examiners will review a registered adviser’s advertisements including pitch-books, website postings, and public statements to identify any conflicts of interests or risks associated with supervised persons with a history of disciplinary events.”

See Risk Alert

2019 Risk Alert

This Risk Alert shares the Examiner’s observations from the examinations based on the Supervision Initiative described in the 2016 Risk Alert.

“The staff conducted over 50 examinations of advisers in 2017 as part of this Initiative. The advisers examined collectively managed approximately $50 billion in assets for nearly 220,000 clients, the vast majority of whom were retail investors. Advisers were identified for examination through a review of information about disciplinary events and other legal actions involving supervised persons of the adviser, including legal actions that are not required to be reported on Form ADV (e.g., private civil actions).”

The examinations appeared to concentrate on three of the areas identified in the 2016 Risk Alert, excluding Marketing. “Nearly all of the examined advisers received deficiency letters,” was to be expected based on OCIE’s selection criteria.

Staff Observations Specific to Disciplinary Histories

Full and Fair Disclosure. The staff observed that nearly half of the disclosure-related deficiencies of the advisers examined were due to the firms providing inadequate information regarding disciplinary events. For example, advisers:

  • Omitted material disclosures regarding disciplinary histories of certain supervised persons or the adviser itself. Often because the advisers solely relied on these supervised persons to self-report to the firms information about their required disclosures.
  • Included incomplete, confusing, or misleading information regarding disciplinary events. They did not include: the total number of events, the date for each event, the allegations, or whether the supervised persons were found to be at fault. 
  • Did not timely update and deliver disclosure documents to clients, such as updating Form ADV for new disciplinary events of supervised persons reported on CRD.
  • Effective compliance programs. The staff observed that many advisers did not adopt and implement compliance policies and procedures that address the risks associated with hiring and employing individuals with prior disciplinary histories. For example, advisers did not have processes reasonably designed to identify:
  • Whether the supervised persons’ self-attestations regarding disciplinary events completely and accurately described those events.
  • Whether the supervised persons’ self-attestations that they were not the subject of reportable events or recent bankruptcies was in fact the case.

Additional Staff Observations

Compliance and Supervision

  • Supervision. Advisers’ policies and procedures did not sufficiently document the responsibilities of supervised persons or did not clearly outline the expectations for these individuals. Examples where the adviser did not:
  • Oversee whether fees charged by supervised persons were disclosed or assess whether the services clients paid for were performed.
    • Have advertising policies and procedures that provided sufficiently specific guidance to supervised persons who prepared their own advertising materials. 
    • Include reviewing activities of supervised persons, including supervised persons with disciplinary histories. Unbeknownst to the advisers, geographically dispersed supervised persons were operating in a self-directed manner that was not consistent with the advisers’ policies and procedures.
  • Oversight.  These advisers may have had policies and procedures that clearly assigned the individuals who were responsible for performing particular duties, but the firms did not implement them or did not document that these duties were performed according to the advisers’ policies and procedures. In some instances, the duties included key regulatory and business responsibilities for advisers managing investor assets, such as:
  • Monitoring the appropriateness of client account types. For example, although outlined within the advisers’ policies and procedures, the firms did not review whether at account opening the type of account selected was appropriate, document that an assessment of the type of account took place, or document the factors considered in making these assessments.
    • Maintaining true, accurate, and current books and records, including those necessary to provide investment supervisory or management services to clients (e.g., maintaining a list of all accounts in which the adviser is vested with discretionary authority).
  • Compliance policies and procedures. The staff observed that several advisers had adopted policies and procedures that were inconsistent with their actual business practices and disclosures. Areas of inconsistent compliance practices most frequently cited involved commissions, fees, and expenses. 
  • Annual compliance reviews. The staff observed that advisers’ annual reviews were insufficient because the firms did not take steps to adequately document the reviews and appropriately assess the risk areas applicable to the firms or identify certain risks at all.

Disclosure of Conflicts of Interest

  • Compensation arrangements. The staff observed that several advisers had undisclosed compensation arrangements, which resulted in conflicts of interest that could have impacted the impartiality of the advice the supervised persons gave to their clients.

See Risk Alert


We really enjoy this new information download from the SEC.  It wasn’t too many years ago that the SEC guarded its priorities and we had to hunt for any hints about what the SEC expected.  Now, on an annual basis the SEC tells us what they are looking for (Examination Priorities), and in many cases, how we can correct the problems.  With Risk Alerts, the SEC informs us during the year as to any new concerns they have, or any problematic areas they have identified. With all this information available, it’s surprising that the SEC finds any deficiencies, but then we must remember the doubters.  You know them, “I can’t believe that the SEC is looking at all of that stuff, when I was examined 15 years ago, they didn’t look at any of that!” and “I’ve been registered for five years and never seen the SEC, they won’t ever examine me!” If you haven’t spent time reviewing the latest Risk Alert, it’s very worthwhile.  After OCIE goes over the deficiencies identified above, they tell you how to prevent or correct them.  You can skim through the list of deficiencies above, but you’ll want to carefully read the solutions.

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