At the end of 2016, the SEC Office of Compliance Inspections and Examinations (“OCIE”) issued a National Exam Program Risk Alert regarding its new Multi-Branch Adviser Initiative.
Why was the alert issued?
OCIE staff “observed an apparent increase in the use of investment advisers employing a business model with numerous branch offices and operations geographically dispersed from the adviser’s principal or main office.”
OCIE expressed concern that the use of a branch office model could pose unique risks and challenges to advisers, particularly in the design and implementation of a compliance program and the supervision of people and processes in branch offices.
What does the alert mean?
In the alert, OCIE stated its commitment to examining advisers operating out of multiple branch offices to determine whether they are in compliance with all applicable laws and regulations.
There are several areas where OCIE outlined their focus for implementation, including:
- Implementation of policies and procedures in the main office and branch offices
- Supervision structure
- Role and empowerment of compliance personnel at branch offices
- Accuracy of filings
- Calculation of fees and overall billing processes at branch offices
- Control over advertising materials originating and/or disseminated from branch offices
- Implementation of a firm’s Code of Ethics
- Asset controls
- Provision of investment recommendations
In January of this year, OCIE reiterated its intent to continue to focus on registered investment advisers that provide advisory services for multiple locations.
How do firms and advisers prepare?
In view of this initiative, advisers with multiple locations should take proactive steps to examine the adequacy and efficiency of their supervisory controls over remote locations and personnel.
As part of this review, firms should review their Form ADV filings and compliance manuals to ensure that these documents provide the necessary disclosures and sufficiently address specific risks associated with administering a compliance program over multiple geographic areas.
Furthermore, an onsite audit of each location should be undertaken, with the intent to examine all aspects of supervision, including:
- Maintenance of required books and records
- Advertising controls
- Proper identification of access persons
- Timely submission and monitoring of personal securities transactions
- Controls related to the identification of accounts over which adviser has custody
- Business continuity and cybersecurity
- Identity theft protection measures and supervisions
- Review of investment recommendations made to clients.
By following these steps, firms and advisers can adequately assess their controls and meet compliance expectations.