Investment advisers newly registering with the Securities and Exchange Commission (SEC) have been observed not devoting sufficient resources to their chief compliance officers, sometimes ladling additional responsibilities on the role that take away from time to focus on compliance, according to the agency.
The SEC shared its findings in a risk alert published Monday detailing common compliance deficiencies uncovered among newly registered advisers during examinations. The agency prioritizes examining such advisers shortly after their registration becomes effective to ensure compliance policies and procedures and disclosures to clients are up to snuff.
During recent inspections, the SEC has identified compliance issues in the following areas among advisers:
- Not adequately addressing risk areas applicable to the firm like portfolio management and fee billing;
- Omitting procedures to enforce stated policies, such as claiming to seek best execution but not having procedures to evaluate periodically the execution quality of broker-dealers; and
- Procedures not followed by advisory personnel because they were unaware of the policies or procedures and/or the procedures’ applicability to their businesses or operations.
Exacerbating these deficiencies in some cases were “additional and unrelated responsibilities to the chief compliance officer, resulting in limited time for the CCO to dedicate to compliance,” the SEC said, adding advisers were observed not empowering compliance personnel to understand business practices.
The agency added use of off-the-shelf compliance manuals not tailored for consistency with operations and business lines and outsourced compliance functions not assessed as being consistent with policies and procedures as other issue areas.
Also flagged in the alert were omissions and inaccuracies in disclosures regarding fees and compensation, client services, conflicts of interest, and false or misleading information contained in marketing materials.
“The (Examinations) Division has focused, and will continue to focus, on examinations of newly registered advisers to provide an opportunity for early engagement with advisers and to assist firms in their compliance efforts,” the SEC concluded. “Advisers are encouraged to review their compliance policies and procedures, marketing, and disclosures for the issues discussed.”
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