On November 9, 2020, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) released observations from its “Multi-Branch Initiative.” This initiative focused on investment advisers operating from numerous branch offices and with operations geographically dispersed from the adviser’s main office.
Specifically, OCIE examined advisers on two practices:
- Compliance programs and supervision. OCIE staff looked at compliance programs both in main offices and branch offices and oversight by main offices of advisory services performed through branches.
- Investment advice. Staff evaluated processes by which supervised staff in branch offices provided investment advice to clients, including how they develop investment recommendations and how client portfolios were managed.
Broadly speaking, staff found that branch office models can pose certain risk factors that need to be considered when implementing compliance programs and in supervising branch personnel.
The following are highlights from the report.
Compliance and Supervision
OCIE found that “the vast majority” of examined advisers were cited for at least one Compliance Programs Rule-related deficiency. More than half of these advisers had compliance policies and procedures that were inaccurate because of outdated information, not applied consistently across branches, inadequately implemented or not enforced at all.
For instance, one shortcoming was that some advisers did not have policies and procedures to limit supervised persons’ ability to process withdrawals and deposits in client accounts, and/or change client addresses of record. In some cases, advisers also did not have policies that were designed to identify and remediate instances where clients were charged undisclosed fees.
OCIE also found deficiencies related to the oversight and supervision of supervised persons, advertising materials, and codes of ethics.
Investment Advice
OCIE identified portfolio management practice deficiencies in more than half of the examined advisers. Typically, these related to investment decision oversight, conflict-of-interest disclosures and trading allocation decisions.
A few examples cited:
- Some advisers purchased for their clients share classes of mutual funds charging 12b-1 fees despite having access to lower-cost share classes. They stood to benefit from clients paying those higher fees yet did not disclose that conflict of interest. Notably, this issue has been the subject of SEC enforcement as both individual cases and via the Division of Enforcement’s Share Class Initiative.
- Advisers implemented automated account rebalancing that caused clients to incur short-term redemption fees.
- Clients often incurred additional costs as a result of advisers failing to adequately assess whether investment programs were in their best interest, charged commissions erroneously or misrepresented or did not properly disclose their wrap fee program.
This information was collected across roughly 40 examinations of advisers’ main offices, as well as at least one examination of each branch office. These advisers, each with 10 or more branch offices, collectively managed about $110 billion in assets across approximately 185,000 clients, most of whom were retail investors.
Staff Observations Regarding Compliance Practices
OCIE also identified good practices that advisers with similar branch-office models could use in their own compliance efforts.
For example, some advisers adopted and implemented written compliance policies and procedures that applied to all offices (and all types of employees), addressed the unique aspects of working in individual branch offices, and specifically included compliance practices that are necessary to properly oversee branch offices.
Some advisers either did periodic reviews of key activities or ran compliance tests at their branch offices at least once a year.
Lastly, some advisers also implemented policies of checking for prior disciplinary events when hiring supervised persons, including periodically confirming whether disclosures about said information were accurate.
Click here to read the full list of OCIE observations.