3 Compliance Failures of Newly Registered Advisors: SEC

The Securities and Exchange Commission warned Monday that newly registered advisors’ compliance policies aren’t up to snuff, including their marketing practices, which appear to contain false or misleading information.

In a just-released risk alert, the SEC’s Office of Examinations cites three deficiencies in newly registered advisors’ compliance practices.

For the past several years, the exam division states that it has prioritized examining newly registered advisors “within a reasonable period of time” after their SEC registration has become effective.

These exams, the division states, typically involve document requests and interviews with advisory personnel addressing the advisor’s business and investment activities, organizational affiliations, compliance policies and procedures, and disclosures to clients.

The exams staff’s review of recent newly registered advisor exams identified issues in three areas, among others: compliance policies and procedures, disclosure documents and filings, and marketing.

According to the alert, these firms’ compliance policies and procedures fell short in three ways:

• They did not adequately address certain risk areas applicable to the firm, such as portfolio management and fee billing.
• They omitted procedures to enforce stated policies, such as stating the advisors’ policy is to seek best execution, but not having any procedures to evaluate periodically and systematically the execution quality of the broker-dealers executing their clients’ transactions.
• They were not followed by advisory personnel, typically because the personnel were not aware of the policies or procedures, or the policies or procedures were not consistent with their businesses or operations.

Some required disclosure documents “also contained omissions or inaccurate information and untimely filings,” the agency said.

The disclosure omissions and inaccuracies were related to advisors’ fees and compensation,  business or operations, as well as services offered to clients, such as disclosure regarding advisors’ investment strategy — including the use of models, aggregate trading and account reviews, the alert states.

Advisors’ marketing materials, meanwhile, “appeared to contain false or misleading information, including inaccurate information about advisory personnel professional experience or credentials, third-party rankings, and performance,” the alert states.

Advisors “were also unable to substantiate certain factual claims” in their marketing, the agency said.

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