The Five Most Frequent Compliance Topics Identified in OCIE Examinations of Investment Advisers

By February 26, 2017New in Compliance

February 7, 2017:  The U.S. Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) published their latest Risk Alert – “The Five Most Frequent Compliance Topics Identified in OCIE Examinations of Investment Advisers” – which provides interesting insight into the Commission’s 2016 examination results for investment advisers.  We have summarized this alert to apprise our clients of the ongoing regulatory scrutiny to which advisers have become accustomed after many years of SEC oversight.

Worthy of note is that the OCIE continues to find deficiencies and refer for enforcement actions on issues which have been attendant to the regulatory regime since the inception of the Compliance Rule in 2004. One exception to this observation is the topic of custody, where the Staff cites ongoing compliance problems with the custody rule, which was substantially amended in 2010.

Given the ongoing ascendancy of compliance within the client due diligence process, it behooves advisers to take note of these findings and to amend policies, procedures, and internal controls to address these issues.

The five compliance topics addressed in this Risk Alert are deficiencies or weaknesses involving:

  1. Compliance Rule 206(4)-7;
  2. Required regulatory filings;
  3. Custody Rule 206(4)-2;
  4. Code of Ethics Rule 204A-1; and
  5. Books and Records Rule 204-2.

Compliance Rule

The Compliance Rule makes it unlawful for an adviser to provide investment advice to clients unless the adviser: (1) adopts and implements written policies and procedures reasonably designed to prevent violation, by the adviser and its supervised persons, of the Advisers Act and the rules adopted thereunder; (2) reviews, no less frequently than annually, the adequacy of its policies and procedures and the effectiveness of their implementation; and (3) designates a qualified Chief Compliance Officer to implement the adviser’s compliance program.

The following list highlights recurring deficiencies and/or referrals for enforcement regarding the Compliance Rule:

  • Compliance manuals were not reasonably congruent with the adviser’s business practices. Many compliance programs did not consider important individualized business practices such as the adviser’s particular investment strategies, types of clients, trading practices, valuation procedures, and advisory fees. Moreover, examiners continue to observe that some advisers use “off-the-shelf” compliance manuals that have not been tailored to the adviser’s individual business practices.
  • Annual reviews are not performed or did not address the adequacy of the adviser’s policies and procedures. Examiners observed that certain advisers did not conduct annual reviews or if they did, such reviews did not address deficient policies, procedures, or internal controls relative to the adviser’s business model. In some cases, when deficiencies were cited in the review, they were not subsequently addressed as required by rule.
  • Advisers did not comply with their compliance policies and procedures. This is the equivalent of a rule violation and is cited as such by the OCIE.
  • Compliance manuals are not current. Examiners noted that certain compliance manuals contained information or policies that were no longer current, e.g., investment strategies and products that were no longer offered, or personnel designated as responsible parties who were no longer employed by the registrant.

Regulatory Filings

Advisers are obligated to accurately complete and timely file certain regulatory filings with the Commission. Among other filing requirements, Rule 204-1 under the Advisers Act requires advisers to amend their Form ADV at least annually, within 90 days of the end of their fiscal year and more frequently, if required by the instructions to Form ADV.  Rule 204(b)-1 under the Advisers Act requires advisers to one or more private funds with private fund assets of at least $150 million to complete and file Form PF.

The following list highlights recurring deficiencies and/or referrals for enforcement regarding regulatory filings:

  • Inaccurate disclosures. Examiners observed that advisers made inaccurate disclosures on Form ADV Part 1A or in Form ADV Part 2A brochures, such as inaccurately reporting custody information, regulatory assets under management, disciplinary history, types of clients, and conflicts.
  • Untimely amendments to Form ADV’s.
  • Incorrect and untimely Form PF filings.
  • Incorrect and untimely Form D filings. 

Custody Rule

Advisers with custody of client cash or securities must comply with the Custody Rule.  An adviser has custody if it or its related person holds, directly or indirectly, client funds or securities or has any authority to obtain possession of them, e.g., an adviser that serves as the general partner, managing member or other comparable position of a pooled investment vehicle generally has custody of client assets because the position typically gives legal ownership or access to client funds and securities.  An adviser also has custody if it has an arrangement under which it is authorized or permitted to withdraw client funds or securities.  The Custody Rule prescribes many requirements designed to enhance the safety of client assets by protecting them from unlawful activities or financial problems of the adviser.

The following list highlights recurring deficiencies and/or referrals for enforcement regarding the Custody Rule:

  • Advisers did not recognize that they may have custody due to online access to client accounts. Online access to client accounts may meet the definition of custody when such access provides the adviser with the ability to withdraw funds and securities from client accounts, or provides access to passwords/usernames.
  • Advisers with custody obtained surprise examinations that did not meet the requirements of the Custody Rule. In some cases, advisers did not provide independent public accounting firms performing surprise examinations with a complete list of accounts over which the adviser had custody, while in other cases, advisers did not provide information to accountants to permit timely filing of accurate Form ADV-E’s.
  • Advisers did not recognize that they may have custody due to certain authority over client accounts. For example, advisers did not appear to recognize that they may have custody over client accounts when retaining (or related persons having) powers of attorney and thereby gaining access to client funds. Other examples of custody that were not acknowledged included when advisers or their related persons served as trustees of clients’ trusts or general partners of client pooled investment vehicles.

Code of Ethics Rule

The Code of Ethics Rule requires an adviser to adopt and maintain a code of ethics which sets forth a number of requirements, including the following;  (1) establish a standard of business conduct that the adviser requires of all its supervised persons; (2) require an adviser’s “access persons” to periodically report their personal securities transactions and holdings to the adviser’s chief compliance officer or other designated persons; and (3) require that access persons obtain the adviser’s pre-approval before investing in an initial public offering or private placement.  In addition, an adviser must provide each supervised person with a copy of the code of ethics and any amendments, and require their supervised persons to provide the adviser with a written acknowledgement of their receipt.  An adviser also must describe its code of ethics in its Form ADV Part 2A brochure and indicate that the code of ethics is available to any client or prospective client upon request.

The following list highlights recurring deficiencies and/or referrals for enforcement regarding the requirement to develop and distribute a compliant code of ethics:

  • Examiners determined that advisers did not identify all access persons (e.g., certain employees, partners, or directors) and therefore were not reviewing personal securities transactions and holdings of the non-referenced personnel.
  • Codes were missing required procedures attendant to policy, e.g., not specifying the process for reviewing holdings and transactions reports, or not defining report submission timeframes, as required by rule.
  • Untimely submission of transactions and holdings.
  • The Staff observed that certain advisers did not describe their codes of ethics in their Part 2A of Form ADV’s and did not indicate that their codes of ethics are available to any client or prospective client upon request.

Books and Records Rule

The Books and Records Rule requires advisers to make and keep certain books and records relating to their investment advisory business, including typical accounting and other business records as required by the Commission.

The following list highlights recurring deficiencies and/or referrals for enforcement regarding the Books and Records Rule:

  • Advisers did not maintain all required records, such as advisory agreements and general ledgers.
  • Books and records were inaccurate or not updated.
  • Records were self-contradicting, e.g., active clients and billable client records were not consistent.


The Commission’s risk-based examination protocol which is used to target surprise and ‘for cause’ examinations in conjunction with the SEC Whistleblower Program has begun to rectify the asymmetric condition that persistently dogged the SEC as the Commission regulated over 14,000 investment advisers post Dodd-Frank. Additionally, and as noted in this article, compliance continues to assume increasing importance in the client due diligence process, especially for institutional accounts. These circumstances should compel CCOs to overlay these findings with their compliance programs and remove any low hanging fruit from an examiner’s scrutiny and in so doing, further preserve the reputation and integrity of the compliance program.

Follow this link to read the Risk Alert:
















Horrigan Resources, Ltd.


Wexford, Pennsylvania                            724-934-0129         


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