On November 9, 2020, the SEC’s Office of Compliance Inspections and Examinations (OCIE) published their observations from its Multi-Branch Initiative. Under this initiative, the OCIE conducted exams primarily on investment advisers operating from numerous branch offices and with geographically dispersed operations. These exams assessed the compliance and supervisory practices for advisory personnel working within the advisers’ branch offices and evaluated how supervised persons located in branch offices provided investment advice to advisory clients. The intent of this alert is to encourage advisers to consider the unique risks and challenges of employing a business model that includes numerous branch offices and business operations and to adopt policies and procedures to address those risks and challenges. The OCIE’s observations were as follows:
The staff observed compliance policies and procedures that were inaccurate, inconsistently applied across branch offices, inadequately implemented (e.g., missing required records) or not enforced. For example, advisers failing to recognize that they had custody of client assets, failing to adequately implement and oversee their fee billing practices, or both.
Oversight and Supervision of Supervised Persons
Supervision deficiencies related to the failure to disclose material information (e.g., disciplinary events), portfolio management (e.g., recommendations not in the client’s best interest) as well as trading and best execution.
Advertising deficiencies related to materials prepared by supervised persons located in branch offices and/or supervised persons operating under a name different than the primary name of the adviser (also known as doing business as or DBAs) in which material disclosures related to performance were omitted or materials included superlatives or unsupported claims, credentials that were false or third-party rankings or awards that omitted material facts.
Code of Ethics Violations
Deficiencies included failing to comply with reporting requirements, review transactions and holdings report and properly identify access persons or omitting certain required provisions in their codes of ethics (e.g., pre-approval of limited or private offerings, submitting holdings reports or quarterly transaction reports).
Deficiencies related to portfolio management practices often were related to oversight of investment decisions (e.g., mutual fund share class selection and disclosure issues, wrap fee program issues and rebalancing issues), conflicts of interest disclosure and trading allocation decision.
Best Practices Observed
The SEC highlighted some of the best practices observed, including:
- Written compliance policies and procedures that are applicable to all office locations and supervised persons including independent contractors; polices tailored to the unique practices of each individual branch office; and policies that specifically address compliance practices necessary for effective branch office oversight.
- Compliance testing or periodic reviews of key activities at all branch offices conduct at least annually, or more frequently as necessary.
- Established compliance policies and procedures to check for disciplinary events upon hire and periodically thereafter.
- Required compliance training for branch office employees.
For further information and examples of deficiencies and best practices observed by the SEC, you can find the entire report here.