The Five Most Frequent Compliance Topics in SEC Exams

The SEC’s Office of Compliance Inspections and Examinations published a list of the five compliance topics most frequently identified in deficiency letters that were sent to SEC-registered investment advisers.

The five are actually the bulk of advisor compliance requirements. It’s the examples in the five topics that are the most useful indicators.

Compliance Rule

  • 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.
  • Compliance manuals are not current.

Regulatory Filings

  • Inaccurate disclosures
  • Untimely amendments to Form ADVs
  • Incorrect and untimely Form PF filings
  • Incorrect and untimely Form D filings

Custody Rule

  • Advisers did not recognize that they may have custody due to online access to client accounts.
  • Advisers with custody obtained surprise examinations that do not meet the requirements of the Custody Rule.
  • Advisers did not recognize that they may have custody as a result of certain authority over client

Code of Ethics Rule

  • Access persons not identified
  • Codes of ethics missing required information
  • Untimely submission of transactions and holdings.
  • No description of code of ethics in Form ADVs

Books and Records Rule

  • Did not maintain all required records.
  • Books and records are inaccurate or not updated.
  • Inconsistent recordkeeping.

The only thing surprising about this publication is that conflicts are not mentioned.  I had assumed that undisclosed conflicts or improperly managed conflicts was the biggest problem found in SEC exams. This list makes it seem like ministerial missteps and sloppy paperwork are the most common problems.