The Securities and Exchange Commission’s exam division flagged Thursday numerous deficiencies in advisors’ compliance programs — namely lack of resources, as well as failing to give the chief compliance officer sufficient authority.
In a Thursday Risk Alert, the agency cites six main categories where advisors are falling short in complying with Rule 206(4)-7, the Compliance Rule, under the Investment Advisers Act of 1940:
- Inadequate compliance resources;
- Insufficient authority of CCOs;
- Annual review deficiencies;
- Implementing actions required by written policies and procedures;
- Maintaining accurate and complete information in policies and procedures; and
- Maintaining or establishing reasonably designed written policies and procedures.
Staff in the agency’s Office of Compliance, Inspections and Examinations observed advisors that did not devote adequate resources, such as information technology, staff and training, to their compliance programs.
For example: CCOs who had numerous other professional responsibilities, either elsewhere with the advisor or with outside firms, and who did not appear to devote sufficient time to fulfilling their responsibilities as CCO, the alert states.
Related: SEC Alert Flags ‘Multi-Branch’ Risks
“While CCOs may have multiple responsibilities, OCIE observed instances where such CCOs did not appear to have time to develop their knowledge of the Advisers Act or fulfill their responsibilities as CCO,” the alert states.
CCOs also lacked sufficient authority within the firm to develop and enforce appropriate policies and procedures.
Other instances found firms where senior management appeared to have limited interaction with their CCOs, which led to CCOs having limited knowledge about the firm’s leadership, strategy, transactions and business operations, according to the alert.
OCIE observed firms’ policies and procedures that contained outdated or inaccurate information about the firm, including off-the-shelf policies that contained unrelated or incomplete information.
OCIE staff observed firms that did not maintain written policies and procedures or that failed to establish, implement or appropriately tailor written policies and procedures that were reasonably designed to prevent violations of the Advisers Act.
For example, staff observed “advisors that claimed to rely on cursory or informal processes instead of maintaining written policies and procedures. In addition, staff observed advisers that utilized policies of an affiliated entity, such as a broker-dealer, that were not tailored to the business of the advisors,” the alert states.