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Regulation and Compliance > Federal Regulation > SEC

SEC's Top 5 Advisor Compliance Failures

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Just a month after releasing its exam priorities for 2017, the Securities and Exchange Commission has issued a risk alert to advisors flagging the top five compliance failures the agency has detected in exams.

The Office of Compliance Inspections and Examinations says the list of most frequently identified compliance failures were sent to SEC-registered advisors via deficiency letters.

Within each of the five topics, OCIE cites in the alert examples of typical deficiencies to highlight the risks and issues that examiners commonly identified.

OCIE notes in the alert that failures within the scope of this review resulted in “a range of actions,” including advisors enhancing written compliance procedures, policies or processes, changing business practices or devoting more resources or attention to the area of compliance.

Also, where appropriate, the staff referred exams to the Division of Enforcement for further action.

If confirmed, incoming SEC Chairman Jay Clayton will have to replace OCIE head Marc Wyatt, who said he’s leaving the agency this month.

Pete Driscoll, chief risk and strategy officer for the SEC’s Office of Compliance Inspections and Examinations, will become the acting director. Driscoll previously served as OCIE’s managing executive from 2013 through early 2016.

Read on to see the five compliance topics addressed in OCIE’s Risk Alert:

The Compliance Rule

1. The Compliance Rule

Deficiencies included: Compliance manuals are not reasonably tailored to the advisor’s business practices; annual reviews are not performed or did not address the adequacy of the advisor’s policies and procedures; advisor does not follow compliance policies and procedures; compliance manuals are not current.

2. Required regulatory filings

Deficiencies included: 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 ADVs; incorrect and untimely Form D filings on behalf ofn private fund clients; incorrect and untimely Form PF filings. The staff observed that certain advisors with an obligation to file Form PF did not complete the form accurately or completely.

Code of Ethics Rule

3. The Custody Rule

Advisors failed to recognized that they may have custody due to online access to client accounts, while other advisors with custody obtained surprise examinations that do not meet the custody rule. Also advisors did not recognize that they may have custody as a result of certain authority over client accounts.

4. Code of Ethics Rule

Deficiencies or weaknesses included: Access persons not identified, codes of ethics missing required information, untimely submission of transactions and holdings, as well as no description of code of ethics in Forms ADV.

Books and Records Rule

5. Books and Records Rule

Advisors failed to maintain all required records, include trade records, advisory agreements and general ledgers. Also, books and records are inaccurate or not updated, or there were inconsistent recordkeeping, which including advisors maintaining contradictory information in separate sets of records.

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