OCIE Finds Several Compliance Deficiencies in Multibranch Firms’ Offices

The SEC’s Office of Compliance Inspections and Examinations conducted a series of examinations that focused on registered advisers operating from numerous branch offices and with operations geographically dispersed from the adviser’s principal or main office. OCIE released a Risk Alert containing observations resulting from the examinations, including nearly 40 examinations of advisers’ main offices combined with one or more examinations of each adviser’s branch offices. OCIE reported that the vast majority of the examined advisers were cited for at least one deficiency related to the Compliance Rule. In particular, the staff observed that more than one-half of these advisers had compliance policies and procedures that were: (1) inaccurate because they included outdated information, such as references to entities no longer in existence and personnel that had changed roles and responsibilities; (2) not applied consistently in all branch offices; (3) inadequately implemented because, among other things, the compliance department did not receive records called for in the policies and procedures; or (4) not enforced. Other findings:

• Fees and expenses: Clients were overcharged advisory fees in a variety of ways, such as when the adviser: (1) used inaccurate fee calculations by, for example, misapplying tiered fee structures or employing incorrect valuations for the calculations; (2) inconsistently applied fee reimbursements, including for advisory fee offsets for 12b-1 fees from certain mutual fund purchases and refunds for prorated fees paid in advance by clients who terminated their accounts; and (3) charged fees different than the rates included in advisory agreements or on assets that were to be excluded from advisory fees.
• Portfolio management. More than one-half of the examined advisers were cited for deficiencies related to portfolio management practices, includingfor disclosure of conflicts of interest and trading allocation decisions.
• Conflicts of interest disclosures. Several advisers were cited for issues related to conflicts of interest that were not fully and fairly disclosed, such as expense allocations that appeared to benefit proprietary fund clients over non-proprietary fund clients.
• Trading and allocation of investment opportunities. Advisers were cited for the lack of documentation demonstrating the advisers’ analysis regarding obtaining best execution for their clients and completing principal transactions involving securities sold from the firms’ inventory without prior client consent, among other things.