SEC Issues Risk Alert on Investment Adviser Compliance Program Issues

SEC Issues Risk Alert on Investment Adviser Compliance Program Issues

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On November 19, 2020, the Securities and Exchange’s Commission Office of Compliance Inspections and Examinations (“OCIE”) issued a Risk Alert outlining notable compliance issues related to Rule 206(4)-7 (the “Compliance Rule”) of the Investment Advisers Act of 1940 (“Advisers Act”). Among the deficiencies and weaknesses OCIE identified:

  • Inadequate Compliance Resources. Staffers described multiple instances of insufficient resources dedicated to compliance efforts. Examples included a chief compliance officers (“CCO”) that either had duties outside of compliance, or otherwise did not have enough time for their compliance responsibilities; advisers providing insufficient training and/or hiring insufficient staff for compliance functions; and advisers not hiring additional compliance staff even as their businesses grew.
  • Insufficient CCO Authority. Staffers observed issues such as CCOs being kept from accessing critical compliance information, senior management having limited interaction with their CCOs, and management not consulting CCOs about matters with potential compliance implications.
  • Annual Review Deficiencies. Staffers observed advisers claiming to engage in ongoing or annual compliance reviews of policies and procedures, but failing to produce evidence this actually occurred; advisers failing to identify risk areas applicable to the adviser despite claiming they had performed limited annual reviews; and advisers failing to review significant areas of their business.
  • Implementing Actions Required by Written Policies and Procedures. Staffers also observed advisers failing to implement actions required by their own policies and procedures, including training employees, reviewing advertising materials, following compliance checklists and reviewing client accounts to assess consistency of portfolios with investment objectives.
  • Maintaining or Establishing Reasonable Designed Written Policies and Procedures. Staffers observed advisers with deficiencies or weaknesses in various areas:
    • Portfolio management, including oversight of outside managers and other third-party service providers, compliance with client investment restrictions and adherence with advisory agreements;
    • Marketing including solicitation arrangements, misleading marketing presentations and oversight of the accuracy of performance advertising;
    • Trading practices, including allocation of soft dollars, best execution and trade errors;
    • Advisory fees and valuation, including the fee billing process, expense reimbursement policies and procedures and valuation of advisory client assets;
    • Safeguards for client privacy, including physical and electronic security of client information and encryption policies; and
    • General cybersecurity, including access rights and controls, data loss prevention penetration testing and/or vulnerability scans, vendor management, employee training or incident response plans.

The full Risk Alert with all of the relevant OCIE observations can be viewed at SEC.gov.

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Darren Mooney

Partner and Co-Head of Business Development

Darren Mooney is a Partner and the Co-Head of Business Development at Greyline. Before joining Greyline, Darren served as deputy chief compliance officer of Partner Fund Management where he held primary responsibility for the compliance program of the second-largest hedge fund in the Bay Area. Prior to that, Darren spent five years providing compliance consulting services at Cordium and then ACA Compliance Group, where he led the company’s San Francisco office and west coast operations. In addition to providing ongoing consulting services to a variety of investment managers, including hedge fund, private equity, venture capital, real estate, quantitative and other wealth managers, Darren also regularly guided clients through the SEC registration process, implemented tailored compliance programs, supported clients’ live SEC exams, and served as an SEC-mandated independent compliance consultant following an SEC enforcement action. Darren’s other experience includes serving as deputy chief compliance officer and associate counsel at F-Squared Investments where he directly supported the compliance program during the investigation and subsequent enforcement regarding historical advertising practices. Darren has a B.S. in Economics from the University of Delaware and a J.D. from Suffolk University Law School. He is a member of the Massachusetts bar.

Annie Kong

Partner and Head of Venture Capital
Annie Kong is a Partner and Head of the Venture Capital Division at Greyline. She provides ongoing compliance consulting to investment advisers and manages client relationships. Prior to joining Greyline, Annie was part of compliance and operations at a long-only manager-of-managers that advised pension fund clients. While there, she conducted compliance and operational due diligence on SEC-registered investment advisers on the platform. She also oversaw and counseled on various legal matters across the firm. Annie has a B.A. in Economics from the University of California, San Diego, and a J.D. from the University of San Diego School of Law. She is an active member of the State Bar of California.
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