Risky business: 5 often overlooked compliance snafus

February 16, 2017 3:48 PM

The SEC's Office of Compliance Inspections and Examinations recently released a letter outlining five areas where the most common compliance deficiencies occur. The regulator encourages advisers to reacquaint themselves with these topics and review their compliance practices.

We broke down the most common mistakes in each area. Check to see if your business is up to speed by clicking through the blunders examiners come across most often. -- Maddy Perkins

This first rule may appear to be obvious: Stay compliant. It's important enough that the SEC feels it's necessary to repeat. It's unlawful for an adviser to give advice to clients if they fail to adhere to the rules of the Advisers Act. Additionally, all advisers must always designate a chief compliance officer responsible for administering compliance policies and procedures.

It's possible to get into trouble when compliance manuals aren't tailored to the specifics of an adviser's business practices including investment strategy, types of clients, trading practices, advisory fees and valuation procedures. Using an "off-the-shelf" guide that hasn't been customized to the business can land an adviser in hot water. Additionally, these manuals must be current under the Compliance Rule.

Advisers must conduct yearly reviews of compliance policies and procedures under the Compliance Rule. Internal reviews of the practice must be conducted in several areas, from marketing and expenses to employee behavior.

Accurately completing and filing Form ADVs, Form PFs and Form Ds on time is crucial to staying compliant.

Remember, Form ADVs need to be filed annually within 90 days of the fiscal year. Form D is required to be filed within 15 calendar days of the first sale of securities in a private fund.

Disclosing all information correctly is necessary on a Form ADV —including custody information, regulatory AUM, disciplinary history, types of clients and conflicts. Any amendments should be made as soon as the information provided becomes inaccurate.

Advisers with custody of client cash or securities must follow a number of requirements to keep client assets safe from unlawful activities or the adviser's financial problems.

Some advisers simply don't recognize that they have custody by way of power of attorney. Additionally, advisers don't know that they are in breach of the custody rule because of digital access to client accounts. If an adviser has the ability to withdraw funds and securities from accounts, they must identify that they have custody.

Under the Custody Rule, advisers who have custody must hire independent accountants to examine all accounts under their custody. These accountants must file timely and accurate form ADV-Es. Examinations must be conducted on a surprise basis — if the regulator notices exams are being conducted at the same time each year, advisers may be in breach of the Custody Rule.

Advisers must adopt and maintain codes of ethics outlining business conduct and rules regarding disclosing and investing personal securities transactions for all employees.

Advisers who fail to sufficiently identify all of their employees, partners or directors who need to be reviewing their personal securities transactions can be in breach of ethics. All designated employees should be reporting their transactions and holdings frequently.

The regulator must be made aware of an adviser's code of ethics within the annual filing.

The rule requires all advisers to make and keep certain records and books regarding their business, including accounting and other business records.

The rule requires all advisers to make and keep certain records and books regarding their business, including accounting and other business records.