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The 5 Most Common SEC Compliance Violations

A “Risk Alert” from the Securities and Exchange Commission highlights the five most frequent compliance topics identified in deficiency letters sent to SEC-registered investment advisers.

The alert from the SEC's Office of Compliance Inspections and Examinations outlines the list of the five compliance topics most frequently identified in deficiency letters.

Compliance Rule

The SEC’s Compliance Rule makes it unlawful for an adviser to provide investment advice to clients unless the adviser does certain things (briefly summarized as implement written policies, review those policies annually, and designate a chief compliance officer to administer those policies). Under that category, the SEC cites the following as typical examples of deficiencies: compliance manuals are not reasonably tailored to the adviser’s business practices; annual reviews are not performed or did not address the adequacy of the adviser’s policies and procedures; adviser does not follow compliance policies and procedures; and the compliance manuals are not current.

Regulatory Filings

Under this category, the SEC cites as “typical examples” of shortcomings the following: inaccurate disclosures (notably inaccurately reporting custody information, regulatory assets under management, disciplinary history, and types of clients and conflicts); untimely amendments to Form ADVs; incorrect and untimely Form PF filings; and incorrect and untimely Form D filings.

Custody Rule

“Typical examples” of deficiencies or weaknesses with respect to the Custody Rule cited by the SEC include: advisers did not recognize that they may have custody due to online access to client accounts (an adviser’s online access to client accounts may meet the definition of custody when such access provides the adviser with the ability to withdraw funds and securities from the client accounts); advisers with custody obtained surprise examinations that do not meet the requirements of the Custody Rule; and advisers did not recognize that they may have custody as a result of certain authority over client accounts (say, as a result of having (or related persons having) powers of attorney authorizing them to withdraw client cash and securities).

Code of Ethics Rule

Access persons not identified, codes of ethics missing required information (such as not specifying review of the holdings and transactions reports, or the specific submission timeframes), untimely submission of transactions and holdings, and no description of code of ethics in Form ADVs (including not indicating that their codes of ethics are available to any client or prospective client upon request) are cited as “typical” examples of violations in this category.

Books and Records Rule

The Books and Records Rule requires advisers to make and keep certain books and records relating to their investment advisory business, including typical accounting and other business records. Typical examples of violations cited by the SEC include: did not maintain all required records (such as trade records, advisory agreements and general ledgers); books and records are inaccurate or not updated (such as inaccurate fee schedules and client records or stale client lists); and inconsistent recordkeeping.

In sharing the information in this Risk Alert, the SEC’s Office of Compliance Inspections and Examinations said it “hopes to encourage advisers to reflect upon their own practices, policies and procedures in these areas and to promote improvements in investment adviser compliance programs.”