SEC Publishes July 2008 ComplianceAlert
Today, the U.S. Securities and Exchange Commission (SEC) released its July 2008 ComplianceAlert letter which identifies and describes common deficiencies and weaknesses that SEC examiners have found during compliance examinations of SEC registered investment advisers/mutual funds, broker-dealers, and transfer agents. The release, which is considered official comment from the SEC’s Office of Compliance Inspections and Examinations and other select SEC department staff, provides valuable guidance for registered investment advisors trying to navigate the regulatory maze. In the release, the SEC provides guidance on four major areas: (1) personal trading by advisory staff; (2) proxy voting and funds’ use of proxy voting services; (3) valuation and liquidity issues in high yield municipal bond funds; and (4) soft dollar practices of investment advisors.
The release was prepared based on information gathered from certain risk-targeted examination reviews. It was written as a tool for Chief Compliance Officers and provides valuable tips and techniques for developing customized compliance programs. While some of the guidance provided by the SEC may have little practical application depending on the specific arrangements of your registered investment advisor, the release is still an excellent resource and should be read by every Chief Compliance Officer. You can read the entire release by clicking here.
Since passage of Rule 206(4)-7, which requires all SEC registered investment advisors to: (1) develop written compliance programs; (2) assess those programs on at least an annual basis; and (3) designate a Chief Compliance Officer, the SEC has made a more concerted effort to interact and be proactive with Chief Compliance Officers through tools such as ComplianceAlerts and the CCOutreach program. However, complying with SEC rules and regulations is a daunting challenge. RIA Compliance Consultants, Inc. can help your registered investment advisor navigate the regulatory maze. Visit our website or contact us to learn more about our suite of compliance consulting services.
The release was prepared based on information gathered from certain risk-targeted examination reviews. It was written as a tool for Chief Compliance Officers and provides valuable tips and techniques for developing customized compliance programs. While some of the guidance provided by the SEC may have little practical application depending on the specific arrangements of your registered investment advisor, the release is still an excellent resource and should be read by every Chief Compliance Officer. You can read the entire release by clicking here.
Since passage of Rule 206(4)-7, which requires all SEC registered investment advisors to: (1) develop written compliance programs; (2) assess those programs on at least an annual basis; and (3) designate a Chief Compliance Officer, the SEC has made a more concerted effort to interact and be proactive with Chief Compliance Officers through tools such as ComplianceAlerts and the CCOutreach program. However, complying with SEC rules and regulations is a daunting challenge. RIA Compliance Consultants, Inc. can help your registered investment advisor navigate the regulatory maze. Visit our website or contact us to learn more about our suite of compliance consulting services.
Labels: Compliance Program, Proxy Voting, Regulatory Inspections, SEC, Soft Dollars
posted by bhill at 2:38 PM
One-Day Audits Being Conducted on Newly Registered SEC Investment Advisers
The U.S. Securities and Exchange Commission (SEC) has been examining certain recently registered investment advisers by conducting limited scope, one-day examinations. According to the SEC’s cover letter sent in advance of these audits, “the purpose of these examinations is to assess and discuss important risk areas presented be the registered investment advisers’ operations and the related compliance policies and procedures implemented by the registered investment advisers to manage those risks.”
RIA Compliance Consultants, Inc. (RCC) has had first-hand experience with these limited scope examinations. A handful of RCC clients have been visited by their respective SEC regional offices this year. Specifically, RCC is aware of the Philadelphia Regional Office and the Atlanta Regional Office conducting these audits. To find out which SEC regional office has jurisdiction over your firm, click here. It appears the SEC is conducting visits of registered investment advisers that have been approved for approximately one year. The examinations appear to be an effort by the SEC to make sure registered investment advisers are on the right track.
As part of the one-day visit, the SEC expects to speak to at least one member of senior management and/or the Chief Compliance Officer to obtain an overall view of the registered investment adviser’s organization, business, control environment, and compliance culture. The following are some of the topics discussed during the visits: the adequacy of the firm’s compliance program; portfolio management decisions being consistent with client mandates; disclosures to clients; brokerage arrangements; allocations among client accounts; personal trading activities of access persons; fiduciary obligations; performance and other information in marketing and advertising; and the safety of client information. Special attention has been paid to firms that manage hedge funds and other pooled accounts.
In preparation of the examinations, the SEC has been requesting a limited list of books and records. The following includes some of the documents requested during these examinations: Form ADV Part II and Schedules; organizational charts (both internal and of all affiliated entities); compliance policies and procedures; client lists including calculations of assets under management; and financial statements.
If you are a newly registered investment adviser, give RCC a call to find out about our mock-regulatory examination and training visits. We can discuss how our consulting services can help you prepare for an examination as discussed in this article or a full-blown routine SEC examination.
RIA Compliance Consultants, Inc. (RCC) has had first-hand experience with these limited scope examinations. A handful of RCC clients have been visited by their respective SEC regional offices this year. Specifically, RCC is aware of the Philadelphia Regional Office and the Atlanta Regional Office conducting these audits. To find out which SEC regional office has jurisdiction over your firm, click here. It appears the SEC is conducting visits of registered investment advisers that have been approved for approximately one year. The examinations appear to be an effort by the SEC to make sure registered investment advisers are on the right track.
As part of the one-day visit, the SEC expects to speak to at least one member of senior management and/or the Chief Compliance Officer to obtain an overall view of the registered investment adviser’s organization, business, control environment, and compliance culture. The following are some of the topics discussed during the visits: the adequacy of the firm’s compliance program; portfolio management decisions being consistent with client mandates; disclosures to clients; brokerage arrangements; allocations among client accounts; personal trading activities of access persons; fiduciary obligations; performance and other information in marketing and advertising; and the safety of client information. Special attention has been paid to firms that manage hedge funds and other pooled accounts.
In preparation of the examinations, the SEC has been requesting a limited list of books and records. The following includes some of the documents requested during these examinations: Form ADV Part II and Schedules; organizational charts (both internal and of all affiliated entities); compliance policies and procedures; client lists including calculations of assets under management; and financial statements.
If you are a newly registered investment adviser, give RCC a call to find out about our mock-regulatory examination and training visits. We can discuss how our consulting services can help you prepare for an examination as discussed in this article or a full-blown routine SEC examination.
Labels: Compliance Training, Regulatory Inspections, SEC
posted by bhill at 2:22 PM
Lori Richards Provides Insight to SEC Exam Focus
On March 20, Lori Richards, Director - SEC's Office of Compliance Inspections and Examinations, delivered a speech explaining the SEC's current registered investment advisor examination priorities. The speech highlights the "top 10" areas of focus during routine examinations. While not an official statement from the SEC, Ms. Richards' speech provides excellent insight into the current mindset of the SEC Office of Compliance Inspections and Examinations.
It is important to note that the focus of an SEC examination will largely depend on a registered investment advisor firm's actual business operations, services, arrangements, policies and procedures. However, all registered investment advisor firms can benefit from reading Ms. Richards' speech in its entirety so that the areas of emphasis are understood and your firm can be prepared. Registered investment advisor firms should make sure the following areas are covered in their written policies and procedures and analyzed during the firm's annual assessment. The following is the top 10 according to Ms. Richards with highlights provided by RIA Compliance Consultants. To read Ms. Richards' speech in its entirety, click here.
1. Controls Over Valuation. How does the firm value securities? Particularly illiquid, private and other hard-to-price securities.
2. Controls Over Non-Public Information/Personal Trading/Code of Ethics. The SEC is focusing on personal securities transactions during its reviews. Policies to protect client information is also a priority of the SEC.
3. Dealing with Senior Investors. This continues to be a hot topic for both the SEC and state regulators.
4. Compliance and Supervision. Does the program effectively manage and control various compliance risks? Are all advisor representatives and branch offices properly supervised?
5. Portfolio Management. Are management services consistent with client mandates? Are they consistent with client objectives and restrictions?
6. Brokerage Arrangements and Best Execution. Is the registered investment advisor seeking best execution? Does the firm document its best execution reviews? Are arrangements properly and fully disclosed to clients, including services received from broker/dealers?
7. Allocations of Trades. Are all clients treated fairly and investment opportunities allocating consistently?
8. Performance Advertising, Marketing, and Fund Distribution Activities. Are there proper controls to review and approve marketing materials? Can performance numbers be justified and supported? This is a historically hot topic during SEC examinations and an area that consistently results in deficiencies.
9. Safety of Clients' and Funds' Assets. This area includes a focus on the safeguarding of client assets from theft.
10. Information Processing and Protection (books and records, disclosures, and filings). Does the firm have all required books and records? Are those records properly maintained and protected in the event of a disaster? Are all potential conflicts of interest disclosed to clients? Has the firm complied with applicable regulatory filings?
Included in the many services offered by RIA Compliance Consultants, Inc. are mock regulatory examinations and annual compliance program assessments. These services are provided with a goal of assisting registered investment advisor firms comply with applicable rules and regulations and prepare for SEC examinations. If you are interested in these services, please give us a call today.
It is important to note that the focus of an SEC examination will largely depend on a registered investment advisor firm's actual business operations, services, arrangements, policies and procedures. However, all registered investment advisor firms can benefit from reading Ms. Richards' speech in its entirety so that the areas of emphasis are understood and your firm can be prepared. Registered investment advisor firms should make sure the following areas are covered in their written policies and procedures and analyzed during the firm's annual assessment. The following is the top 10 according to Ms. Richards with highlights provided by RIA Compliance Consultants. To read Ms. Richards' speech in its entirety, click here.
1. Controls Over Valuation. How does the firm value securities? Particularly illiquid, private and other hard-to-price securities.
2. Controls Over Non-Public Information/Personal Trading/Code of Ethics. The SEC is focusing on personal securities transactions during its reviews. Policies to protect client information is also a priority of the SEC.
3. Dealing with Senior Investors. This continues to be a hot topic for both the SEC and state regulators.
4. Compliance and Supervision. Does the program effectively manage and control various compliance risks? Are all advisor representatives and branch offices properly supervised?
5. Portfolio Management. Are management services consistent with client mandates? Are they consistent with client objectives and restrictions?
6. Brokerage Arrangements and Best Execution. Is the registered investment advisor seeking best execution? Does the firm document its best execution reviews? Are arrangements properly and fully disclosed to clients, including services received from broker/dealers?
7. Allocations of Trades. Are all clients treated fairly and investment opportunities allocating consistently?
8. Performance Advertising, Marketing, and Fund Distribution Activities. Are there proper controls to review and approve marketing materials? Can performance numbers be justified and supported? This is a historically hot topic during SEC examinations and an area that consistently results in deficiencies.
9. Safety of Clients' and Funds' Assets. This area includes a focus on the safeguarding of client assets from theft.
10. Information Processing and Protection (books and records, disclosures, and filings). Does the firm have all required books and records? Are those records properly maintained and protected in the event of a disaster? Are all potential conflicts of interest disclosed to clients? Has the firm complied with applicable regulatory filings?
Included in the many services offered by RIA Compliance Consultants, Inc. are mock regulatory examinations and annual compliance program assessments. These services are provided with a goal of assisting registered investment advisor firms comply with applicable rules and regulations and prepare for SEC examinations. If you are interested in these services, please give us a call today.
Labels: Compliance Program, Regulatory Inspections, SEC
posted by bhill at 9:36 AM
Have you considered a mock regulatory examination or training audit?
As the new business year begins, many firms are constructing their compliance budgets and initiatives for 2007. A tool we feel can be vital for measuring your firm's compliance barometer is to hire an outside consulting firm to conduct mock examinations or training audit. Such a visit from an outside consulting firm, such as RIA Compliance Consultants, can provide numerous benefits for a firm, regardless of its size. A mock examination provides an objective look at the compliance and regulatory structure of your advisor firm. It can help assess whether or not your firm is prepared for an actual regulatory visit and what the firm needs to do to shore up its compliance policies and procedures. Such a visit also provides an opportunity to receive training from an outside expert who is focused on helping advisor firms meet their fiduciary and regulatory responsibilities. It can also be integrated into your firm's assessment of its internal policies and procedures. It indicates to regulators that the firm is committed to a culture of compliance.
Ultimately, if you are a CCO you have to ask yourself "Is my firm really ready for an SEC visit?" If you can not provide an assertive positive response, it may be time to seek help from an outside consulting firm such as RIA Compliance Consultants. If you would like to learn more about our mock audits, training audits, or our different levels of engagement, please contact us today.
Ultimately, if you are a CCO you have to ask yourself "Is my firm really ready for an SEC visit?" If you can not provide an assertive positive response, it may be time to seek help from an outside consulting firm such as RIA Compliance Consultants. If you would like to learn more about our mock audits, training audits, or our different levels of engagement, please contact us today.
Labels: Compliance Program, Regulatory Inspections
posted by bhill at 11:55 AM
The 5 Most Common Investment Advisor Deficiencies in 2005
Lori Richards, Director of the SEC's Office of Compliance Inspections and Examinations, recently gave a speech at the Investment Adviser Compliance Summit and provided some interesting insights into the current SEC examination process and lessons learned from exams completed in 2005. Based on the approximately 1500 SEC examinations completed last year, these five items were cited as the most common regulatory deficiencies of investment advisors.
1. Lack of Disclosure – This category of deficiencies involved failures to provide proper disclosures within the ADV such as the following: (a) undisclosed conflicts of interest; (b) inaccurate descriptions of a firm's business operations; (c) lack of an explanation that directed brokerage may not result in best execution for the client; and (d) omitted or inaccurate statements regarding the exercise of discretionary authority and custody of client funds and/or securities.
2. Portfolio Management - Issues discovered by the SEC included the failure to implement internal controls intended to ensure investments selected for clients are suitable and meet the client's objectives. Failure to properly document and keep records concerning portfolio management was also frequently cited.
3. Personal Trading by Advisor Employees - The SEC noted that failing to implement a code of ethics is still a major weakness for many advisor firms even though it is required under a specific SEC rule. Investment advisors were also cited for failing to implement procedures to monitor employee personal trading and preventing employees from placing their personal trading interests ahead of the firm's clients.
4. Performance Calculations - Investment advisors must implement procedures designed to calculate and present past investment performance in an accurate and honest fashion. Problems cited by the SEC included overstated performance results, not disclosing how performance results were calculated, using testimonials, and advertising in a misleading manner.
5. Brokerage Arrangements & Execution – Investment advisor firms were cited for not implementing or having inadequate procedures designed to ensure the firm obtains best execution for its clients. Other issues included not disclosing that client money was used to pay referral parties and other goods and services that benefited the firm.
These findings are an excellent roadmap for issues that every investment advisor firm should address in 2006. Please let us know if your firm is interested in retaining RIA Compliance Consultants to conduct a mock regulatory examination or assist your firm with its new annual review obligation.
1. Lack of Disclosure – This category of deficiencies involved failures to provide proper disclosures within the ADV such as the following: (a) undisclosed conflicts of interest; (b) inaccurate descriptions of a firm's business operations; (c) lack of an explanation that directed brokerage may not result in best execution for the client; and (d) omitted or inaccurate statements regarding the exercise of discretionary authority and custody of client funds and/or securities.
2. Portfolio Management - Issues discovered by the SEC included the failure to implement internal controls intended to ensure investments selected for clients are suitable and meet the client's objectives. Failure to properly document and keep records concerning portfolio management was also frequently cited.
3. Personal Trading by Advisor Employees - The SEC noted that failing to implement a code of ethics is still a major weakness for many advisor firms even though it is required under a specific SEC rule. Investment advisors were also cited for failing to implement procedures to monitor employee personal trading and preventing employees from placing their personal trading interests ahead of the firm's clients.
4. Performance Calculations - Investment advisors must implement procedures designed to calculate and present past investment performance in an accurate and honest fashion. Problems cited by the SEC included overstated performance results, not disclosing how performance results were calculated, using testimonials, and advertising in a misleading manner.
5. Brokerage Arrangements & Execution – Investment advisor firms were cited for not implementing or having inadequate procedures designed to ensure the firm obtains best execution for its clients. Other issues included not disclosing that client money was used to pay referral parties and other goods and services that benefited the firm.
These findings are an excellent roadmap for issues that every investment advisor firm should address in 2006. Please let us know if your firm is interested in retaining RIA Compliance Consultants to conduct a mock regulatory examination or assist your firm with its new annual review obligation.
Labels: Regulatory Inspections
posted by bhill at 10:22 AM
NASAA Report on State Investment Advisor Exams
Back in September, the North American Securities Administrators Association (NASAA) released a series of recommended best practices for state advisor firms' compliance programs. The best practices are a result of a NASAA sweep and subsequent report completed and released this year. According to a NASAA press release, the following are recommended best practices:
1) Review and revise Form ADV and the disclosure brochure annually to reflect current and accurate information;
2) Review and update all advisory contracts;
3) Prepare a written supervisory procedures manual relevant to the advisor's business;
4) Prepare and distribute a privacy policy initially and annually;
5) Prepare and maintain all required records;
6) Maintain a surety bond, if required;
7) Prepare and maintain client profiles;
8) Calculate and document fees correctly;
9) Review and revise all advertisements, including performance and advertisements and websites; and
10) Implement appropriate custody safeguards, if applicable.
In addition to the best practice recommendations, a review of the report's most common regulatory deficiencies are quite revealing. The most common deficiency cited relates to registration issues, particularly inaccurate information on the Form ADV, failing to provide clients with a copy of the firm disclosure brochure in a timely manner, and failing to provide or offer to provide a copy of the updated disclosure brochure each year. Other common deficiencies include inadequate supervisory programs and failing to provide a customer privacy statement to all clients. To read the entire NASAA report click here.
RIA Compliance Consultants is focused on helping advisor firms, of all sizes, establish well-run, customized compliance policies and procedures. Our firm specializes in conducting mock SEC and state audits that are focused on identifying and correcting deficiencies. Has your firm implemented NASAA's recommended best practices? Are you confident your firm would pass the scrutiny of a regulator? If you are interested in discussing ways to improve your compliance programs and better prepare your firm for a regulatory review, give us a call.
1) Review and revise Form ADV and the disclosure brochure annually to reflect current and accurate information;
2) Review and update all advisory contracts;
3) Prepare a written supervisory procedures manual relevant to the advisor's business;
4) Prepare and distribute a privacy policy initially and annually;
5) Prepare and maintain all required records;
6) Maintain a surety bond, if required;
7) Prepare and maintain client profiles;
8) Calculate and document fees correctly;
9) Review and revise all advertisements, including performance and advertisements and websites; and
10) Implement appropriate custody safeguards, if applicable.
In addition to the best practice recommendations, a review of the report's most common regulatory deficiencies are quite revealing. The most common deficiency cited relates to registration issues, particularly inaccurate information on the Form ADV, failing to provide clients with a copy of the firm disclosure brochure in a timely manner, and failing to provide or offer to provide a copy of the updated disclosure brochure each year. Other common deficiencies include inadequate supervisory programs and failing to provide a customer privacy statement to all clients. To read the entire NASAA report click here.
RIA Compliance Consultants is focused on helping advisor firms, of all sizes, establish well-run, customized compliance policies and procedures. Our firm specializes in conducting mock SEC and state audits that are focused on identifying and correcting deficiencies. Has your firm implemented NASAA's recommended best practices? Are you confident your firm would pass the scrutiny of a regulator? If you are interested in discussing ways to improve your compliance programs and better prepare your firm for a regulatory review, give us a call.
Labels: Compliance Program, Regulatory Inspections
posted by bhill at 4:11 PM
SEC Re-Considering Advisor Exams
Recently there have been several reports in various industry publications such as The Wall Street Journal and the Compliance Reporter discussing changes the SEC is making to its risk-based approach for advisor firm audits. While the SEC has not finalized the changes, it appears they are close to implementing an approach that would more actively monitor “low-risk” firms. Currently, the SEC divides advisor firms into “high-risk” v. “low-risk” firms with high-risk firms visited on a more frequent and regular basis. According to comments from the SEC, they would randomly select a sampling of low-risk firms each year as opposed to visiting low-risk firm once every five years. Depending on the type and severity of deficiencies found at the low-risk firms, the SEC may move away from visiting high-risk firms more frequently and audit all firms on a more balanced approach.
No matter what type of exam cycle the SEC selects, an advisor firm needs to be prepared for a regulator to show up on any day without prior warning. In other words, take the approach to always be ready for a regulatory examination whether it is an initial audit, a follow-up audit or part of an industry sweep. The best compliance programs are those that are not afraid of an SEC examination. By continually monitoring and supervising compliance procedures, well-run compliance programs are always prepared and actually welcome a regulatory examination. Is your firm ready for an examination? Could you survive the SEC? If you need help creating a compliance and supervisory program that is always ready for the SEC, give us a call today.
No matter what type of exam cycle the SEC selects, an advisor firm needs to be prepared for a regulator to show up on any day without prior warning. In other words, take the approach to always be ready for a regulatory examination whether it is an initial audit, a follow-up audit or part of an industry sweep. The best compliance programs are those that are not afraid of an SEC examination. By continually monitoring and supervising compliance procedures, well-run compliance programs are always prepared and actually welcome a regulatory examination. Is your firm ready for an examination? Could you survive the SEC? If you need help creating a compliance and supervisory program that is always ready for the SEC, give us a call today.
Labels: Regulatory Inspections
posted by bhill at 1:33 PM
