December 15, 2016

Exam Priorities: Multi-Branch Adviser Initiative

Each year the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) creates initiatives in order to address priorities for examinations of SEC-registered investment advisors (“Advisors”). The OCIE recently issued a risk alert about their ongoing initiative to make Advisors with multiple branch offices an examination priority. This initiative will center on examining the effectiveness of supervisory practices over advisory personnel in branch offices.

What you need to know

The OCIE perceives an increase in Advisors having numerous branch offices and operations that are geographically dispersed from the main office. With this increase in the use of a branch office model additional and unique risks are created. In particular, the design and implementation of a compliance program and the supervision of people and processes in branch offices. There are risks that those individual(s) responsible for compliance and oversight will not be able to review adherence to and/or enforce the use of policies and operating procedures.

Review of Compliance Programs

Under SEC Rule 206(4)-7, Advisors are required to implement written policies and procedures reasonably designed to prevent and detect violations of the Advisers Act and related rules by Advisors and their supervised persons. According to the risk alert, during examinations, Advisors will be asked about the oversight of the staff at branch offices and the exam will review the staff’s compliance with your policies and procedures. Through interviews of the staff and inspection of books and records, the exam will assess the:
  • Implementation of policies and procedures in the branch offices.
  • Supervision structure, including an assessment of how such supervision is tailored to the unique risks in particular branches.
  • Role and empowerment of compliance personnel charged with overseeing branch offices, including their level of access to documents and relevant information.
  • Accuracy of information on filings regarding branch offices, including Form ADV, as compared to actual business practices.

Review of Investment Recommendations

As a fiduciary, an Advisor has an obligation to act in the best interests of its clients and to identify and disclose any material conflict of interest. According to the risk alert, during the examination, the Advisor will be asked about the process for formulation of investment recommendations and the management of client portfolios at branch offices. In particular the exam will focus on policies and procedures and supervisory controls that cover the following:
  • Oversight. Supervision and review of investment recommendations made to clients within specific branch offices and across branch offices, including processes and controls regarding investment authority, suitability of the investment advice, and any due diligence that the adviser has told clients is undertaken with respect to investments.
  • Conflicts of Interest. Identification, management, and disclosure of conflicts of interest that arise through branch office activities and personnel, including conflicts arising from various compensation arrangements and supervised persons’ outside business activities.
  • Allocation of Investment Opportunities. Allocation of investment opportunities among client accounts, including how branch offices’ trading activity is monitored and what disclosures are made to clients regarding trade allocation.

Additional Areas of the Review

In addition, the exam may focus on assessing compliance and testing controls in one or more of the following risk areas:
  • Fees and Expenses. The calculation of fees and other expenses, including the effectiveness of controls over the billing and invoicing processes.
  • Advertising. Controls over advertisements, such as the process for reviewing and approving advertisements, particularly those created or disseminated by its branch offices.
  • Code of Ethics. The implementation of the code of ethics, including oversight and monitoring of personal securities transactions and whether have properly identified access persons at branch offices.
  • Custody. Controls related to the identification of accounts which the Advisor maintains custody and the involvement of branch office personnel in making such determinations.

CCO Best Practices

To avoid these deficiencies at your firm AdvisorAssist recommends the best practices of:
  • Perform an annual review of your books and records archive to ensure you are keeping the required documentation.
  • Review your compliance program documents to ensure that they are up to date and correct.
  • Ensure your staff certifies their understanding and adherence to your compliance program at least annually.
  • Test your staff’s adherence to the policies and procedures in your compliance program at least annually.
  • Compile all of your findings into summary reports to document the annual completion of your oversight responsibilities.
  • Conduct formal meetings with any compliance staff in any branch locations to demonstrate supervision to and compliance by those branches.

AdvisorAssist’s CCO Series: Exam Priorities is a series of articles that will help your firm understand and prepare for the most common compliance exam topics. Our goal is to help you increase your confidence that your firm remains “exam ready” as well as some practical steps to help Chief Compliance Officers address this topic.
Brendan Furey
Brian Young

December 13, 2016

CCO Series: Trade Errors

What you need to know

In developing policies and procedures for a registered investment advisor ("RIA") a topic that should be addressed is trade errors. To uphold the fiduciary duty owed to clients of your RIA, your policies and procedures should cover how you handle errors that may occur when trading in a client's account.

Should a trading error occur in a client's account managed by an RIA there are critical response items to consider in order to uphold your fiduciary duty. By having these compliance components in place you can then demonstrate to a regulator that you are compliant in this aspect of your overall compliance program.

What is a Trade Error?

The most common trade error is buying the wrong security or the wrong amount. Here are a few other examples of events that are considered trade errors:

  • Trading in the wrong client account
  • Trading in the wrong direction (buy vs. sell)
  • Trading at the wrong price (limit orders, etc)
  • Incorrect block trade allocation
  • Violation of client account restriction (tobacco, oil, military)
  • Violation of client account suitability (aggressive vs conservative)
  • Delayed execution of trade instructions
  • Duplicate execution of trade instructions

How to handle trade errors

Even if the error does not fit into one of these examples you should discuss any potential or actual trade errors with your CCO to ensure compliance. CCOs should then document the event within their trade error log and save all related documentation for the RIA's books and records. You should then consider communicating with the clients as needed to explain events in their statements or other irregular trading activity. Most trade errors can be resolved prior to settlement by the custodian if they are promptly discovered and communicated.

Reviewing policies and procedures

Advisors should ensure their policies and procedures require the disclosure of trade errors to the CCO and that trade errors are documented in the Advisor's trade error log. The log should also include any related backup or other documentation, that the trade errors are resolved in a way that makes the client whole and absolves the client of consequences of the Advisor's error. Additionally, trade errors should be reviewed at least annually by the CCO or their delegate to ensure that any reasonable changes to the Advisor's business practices that could eliminate future errors is considered for implementation. During this annual review the CCO or delegate should also update the Advisor's trade error policy as needed to ensure it accurately reflects how trade errors are resolved.

What are the next steps for a CCO?

To ensure that you have a compliant trade error policy and procedure AdvisorAssist recommends the best practices of:

  • Ensure any trade errors are documented in your firm's trade error log
  • Keep documentation related to any trade errors as needed to demonstrate the error and its resolution
  • Remain aware of any changes to trade error policies and procedures that may be imposed by your custodian and update your internal policies as appropriate
  • Communicate your trade error policy and procedure to your supervised persons involved in trading activities
  • Complete an annual risk assessment to review your trade error policy and procedures
  • Complete an annual review of your trade error log to ensure errors are documented and resolved according to your policy and procedures

The AdvisorAssist CCO Series is a collection of blog posts that cover each of the elements of your RIA's compliance program. Each post will provide an overview of one compliance topic, including our insights on how regulators view each topic as well as some practical steps to help Chief Compliance Officers address this topic. As always, we would welcome your comments and thoughts.

Michael Conlon

November 8, 2016

Annual Renewal 2017 - Calendar of Events

As we approach the end of 2016 the preparations for your 2017 Annual Renewal have begun. You may have already received notices directly from the applicable states.

As a client of AdvisorAssist we will manage the annual renewal process. Here are important dates to remember in the coming months.

FINRA, as the administrator of the online regulatory systems, has a full calendar of deadlines at

November 14: Preliminary Statements Issued

FINRA will likely email you a Preliminary Statement that summarizes your firm's current registrations and applicable renewal fees. There is no need to send this to AdvisorAssist. We will proactively obtain and verify the accuracy of these statements. Once validated, we will communicate your funding requirements directly to you.

December 16 (FINAL DEADLINE): Payment of Renewal Fees

To maintain the registration of your firm and investment advisor representatives ("IARs"), you must pay the required fees in full by December 16, 2016. In advance of this deadline, AdvisorAssist will provide step by step instructions on how to process payment of the renewal fees.

January 3: Review your Final Renewal Statement

FINRA will provide a Final Renewal Statement to reconcile any refunds due or additional fees owed. AdvisorAssist will review this reconciliation to ensure accuracy. AdvisorAssist will also recommend additional registrations/notice filings that should be made in calendar year 2017.

Annual Renewals: Common Deficiencies

Here are a list of common deficiencies that we will look to avoid:

  • Funding Issues
  • Incorrect ADV Content
  • Missing Registrations or Notice Filings
  • Excessive Registrations or Notice Filings
  • Investment Advisor Representative (IAR) Registrations

If you are not an AdvisorAssist Compliance Client and are seeking assistance with the Annual Renewal process, please contact us at:

Brian Young

November 1, 2016

CCO Series: Compliance Program

What you need to know

Rule 206(4)-7 of the Investment Advisers Act of 1940 requires that all SEC registered investment advisors adopt and implement written policies and procedures that are reasonably designed to prevent violations by the Advisor or any of its supervised persons. Almost all states have also adopted a rule similar to Rule 206(4)-7, which requires state registered investment advisors to also adopt and implement written policies and procedures.

Whether you are SEC registered or state registered your policies and procedures must be detailed and customized to your formalized internal process to meet your fiduciary and regulatory obligations. The SEC has stated in its discussion of Rule 206(4)-7 that Advisors are too varied in their operations for the rules to impose of a single set of universally applicable required elements. Therefore, each Advisor should adopt policies and procedures that take into consideration the unique nature of your firm's operations.

Required policies and procedures

Even though policies and procedures are required to be customized to your operations, you will have to make sure that your policies and procedures are also designed to:

  • prevent violations of fiduciary and regulatory obligations from occurring,
  • detect violations that have occurred, and
  • correct promptly any violations that have occurred.

To design adequate policies and procedures, the Advisor should identify all potential conflicts or factors creating risk exposure for the Advisor, supervised persons and its clients. Only then can an Advisor design policies and procedures that address applicable risks to the Advisor.

At a minimum, the scope of the policies and procedures is expected to address the following issues:

  • The appointment of a Chief Compliance Officer responsible for administering the policies and procedures;
  • Portfolio management processes, including allocation of investment opportunities among clients and consistency of portfolios with clients' investment objectives, disclosures by the adviser, and applicable regulatory restrictions;
  • Trading practices, including procedures to satisfy best execution obligation, uses client brokerage to obtain research and other services ("soft dollar arrangements"), and allocates aggregated trades among clients;
  • Proprietary trading of the advisor and personal trading activities of supervised persons;
  • The accuracy of disclosures made to investors, clients, and regulators, including account statements and advertisements;
  • Safeguarding of client assets from conversion or inappropriate use by supervised persons;
  • The accurate creation of required records and their maintenance in a manner that secures them from unauthorized alteration or use and protects them from untimely destruction;
  • Review of the Client Communications (advertising & marketing), including any solicitors utilized;
  • Processes to value client holdings and assess fees based on those valuations;
  • Safeguards for the privacy protection of client records and information;
  • Code of Ethics; and
  • Business continuity plans.

Reviewing policies and procedures

In addition to having written policies and procedures customized to a firm’s operations, Advisors are also required to review the policies and procedures on an at least annual basis. This annual review should be documented in your books and records. Advisors are also required to maintain documentation that all supervised persons of the Advisor have received and reviewed the policies and procedures. This documentation should be kept for a minimum of five fiscal years from the end of the fiscal year during which the last entry was made on such record.

What are the next steps for a CCO?

To ensure that you have an up-to-date compliance program, AdvisorAssist recommends the best practices of:

  • Completing risk assessments regularly during the fiscal year to document reviews of policies and procedures
  • Conduct periodic testing of processes to ensure that policies and procedures accurately describe your operations
  • Conduct annual due diligence reviews of any third party vendor utilized to support the services of the Advisor
  • Compose an annual CCO report summarizing the findings from risk assessments and tests completed
  • Communicate policies and procedures, and any adhoc amendments, to all of your supervised persons
  • Ensure all supervised persons certify that they have received and reviewed your policies and procedures
  • Maintain all of your documentation of your compliance program according to your books and records matrix

The AdvisorAssist CCO Series is a collection of blog posts that cover each of the elements of your RIA's compliance program. Each post will provide an overview of one compliance topic, including our insights on how regulators view each topic as well as some practical steps to help Chief Compliance Officers address this topic. As always, we would welcome your comments and thoughts.

Brendan Furey
Michael Conlon

October 7, 2016

Protecting Vulnerable Adults from Financial Exploitation

The organization that represents the state securities agencies, North American Securities Administrators Association (NASAA), recently announced that its membership had voted to adopt a model act designed to protect vulnerable adults from financial exploitation.1 The model act, titled “An Act to Protect Vulnerable Adults from Financial Exploitation”, is now available for states to enact as legislation or implement through regulation. In addition, two new rules have been proposed by FINRA, which are also designed to also help combat financial exploitation of vulnerable adults.2 Finally, to bring more attention to this issue, the Consumer Financial Protection Bureau (CFPB) issued a report directed at financial institutions aimed at combating elder financial exploitation.

Protecting Vulnerable Adults in a Nutshell

Vulnerable adults are defined as persons over 65 years of age and those that qualify for protection under a state adult protective services statute. The protections for these individuals impact broker-dealers, investment advisor representatives, and those who serve in a supervisory, compliance, or legal capacity for broker-dealers and investment advisors. Generally, it will mean that as you are dealing with seniors and adults with disabilities, you may have additional responsibilities and a small amount of flexibility from regulators in dealing with certain situations.

Financial Exploitation

The type of financial exploitation that potentially could be stopped is the unauthorized use of the vulnerable adult’s assets, including when a power of attorney, guardianship, or conservatorship is used to make decisions harmful to the client. Both NASAA and the federal agencies have compiled evidence showing that trusted caregivers may obtain control over the vulnerable adult’s assets, then deprive them of the assets or convert the assets by exploiting the services of financial institutions including broker-dealers and investment advisors.3

Possible Changes

State securities regulators, FINRA and the CFPB may begin to incorporate regulatory changes to address this public concern. Advisors that have a reasonable belief that financial exploitation has been attempted or has occurred among their clients may be required to report it to the appropriate regulator and adult protective services agencies. Updates to state and federal rules may also allow advisors to notify any third parties designated by clients of their suspicions of financial exploitation, excepting any third party that are suspected to be the part of the financial exploitation. Finally, state rules may allow advisors to initially delay disbursements from an account of a vulnerable adult for up to 15 business days if, after review, there is suspicion that the disbursement may result in financial exploitation. The advisors may also extend the delay of disbursement for an additional 10 business days at the request of either the state securities regulator or adult protective services.

Crucially, NASAA’s model act grants immunity from administrative or civil liability for advisors when reporting to state regulators and agencies, notifying appropriate third parties, and delaying disbursements based on reasonable suspicions of financial exploitation while acting in good faith. However, the advisor will be required to provide records, including historical records, relevant to the suspected financial exploitation to the state’s adult protective services or law enforcement. As with all things compliance your books and records are very important.

CCO Best Practices

To prepare for dealing with vulnerable adults at your firm AdvisorAssist recommends the best practices of:

  • Train staff to prevent, detect, and respond to elder financial abuse by escalating any suspicious activity to the CCO.
  • Harness technology such as suspicious activity monitoring technology to identify potential financial abuse.
  • Collaborate with stakeholders like custodians, banks, and plan sponsors to identify potentially at-risk clients and trusted third parties acting for the client’s protection
  • Document, validate and report suspicious activity to your state regulators or federal agencies.
  • Offer clients the ability to have your firm notify a trusted third party when financial exploitation is suspected.
  • Maintain awareness of any existing rules or changes at your state securities regulator regarding their adoption of rules regarding vulnerable adults.
1. See NASAA Members Adopt Model Act at: Link.

2. See FINRA Regulatory Notice 15-37, October 2015 at: Link.

3. See Testimony of Judith Shaw, NASAA President before the US Senate Special Committee on Aging at: Link.

AdvisorAssist News for RIAs is a series of articles that will help your firm understand and prepare for changes that may be occurring on the state or federal level. Our goal is to help you increase your confidence that your firm remains in compliance as well as provide some practical steps to help Chief Compliance Officers address this topic.


Brendan Furey
Michael Conlon

September 2, 2016

Final Rules: Updated Form ADV & Books and Records

The Securities and Exchange Commission (the “SEC”) published final rules to amend the Form ADV in order to gather additional about separately managed accounts, create an umbrella registration for affiliated private fund advisors operating a single advisory business, and to add additional identifying questions to the Form ADV. The final rules also amend the books and records rule to clarify the obligation to keep supporting information on performance and rate of return calculations. Please note that these final rules become effective in 60 days; however, compliance with these requirements does not become effective until October 1, 2017.
Click here for a link to the SEC's press release. A link to the Final Rule is included on the right.

Separately Managed Accounts

The final rules will require advisors to aggregate information about the separately managed accounts, in order to improve the SEC’s risk management initiatives and risk-based exam program. The aggregate information about separately managed accounts will include types of assets held and the use of derivatives and borrowings in the accounts. The updated form will also ask that assets in separately managed accounts be reported on Schedule D. Finally, the final rules require advisors to identify the custodians with at least ten percent of separately managed account assets under management, and the amount of the assets under management attributable to the separately managed accounts held at the custodian.

Umbrella Registration for Private Fund Advisors

The final rules also create a process for umbrella registration of private fund advisors that operate a single advisory business through multiple legal entities. Umbrella registration is not mandatory, but will simplify the registration process for these advisors. To qualify for an umbrella registration, the advisor must have a principal place of business in the United States and must advise only private funds and qualified clients in separately managed accounts. Also all of the advisors must operate under the same policies and procedures (including a single code of ethics and single CCO) and be subject to the filing advisor’s supervision and control. Finally, all the advisor must agree to be subject to examination by the SEC.

Additional Form ADV Information Required

In addition to requiring reporting for separately managed accounts and creating umbrella registrations, the final rules also require additional identifying information be provided on the Form ADV.
  1. All Central Index Key numbers (“CIK Number”) for:
    1. The advisor.
    2. Private funds managed by the advisor (or Public Company Accounting Oversight Board, or “PCAOB”-assigned numbers).
  2. The addresses for each social media account where the advisor controls the content, such as Twitter, Facebook or LinkedIn. This does not require the listing of the social media accounts of the employees of an advisor, just the accounts where the advisor control the content.
  3. The total number of offices at which investment advisory business is conducted and details of the 25 largest offices in terms of number of employees.
  4. Report whether the advisor’s chief compliance officer is compensated or employed by any person other than the advisor (or a related person of the advisor or a registered investment company) and if so, the name and IRS Employer Identification Number.
  5. Advisors with assets of $1 billion or more report their assets within three ranges: (a) $1 billion to $10 billion; (b) $10 billion to $50 billion; (c) $50 billion or more.
  6. The number of clients and amount of assets under management attributable to each category of clients.
  7. The number of clients that do not have assets under management.
  8. Amount of assets under management:
    1. Attributable to non-United States clients.
    2. Of all parallel managed accounts related to an investment company (or series thereof) or business development company.
    3. Attributable to acting as a sponsor to or portfolio manager for a wrap fee program.

Books and Records Updates

Currently advisors are required to maintain records supporting performance claims in communications that are distributed or circulated to ten or more persons. However, the final rule requires that advisors maintain:

  1. Records supporting performance claims in any communication that is circulated or distributed, directly or indirectly, to any person.
  2. The originals of written communications received relating to the performance or rate of return of any managed accounts or securities recommendations.
  3. Copies of written communications sent by the advisor relating to the performance or rate of return of any managed accounts or securities recommendations.

How should a Chief Compliance Officer respond to the Rule?

To prepare for the implementation of these rule updates at your firm for the October 1, 2017 compliance date, AdvisorAssist recommends the best practices of:

  1. Review separately managed accounts to ensure that the amount of assets being held, types of assets held, and the use of derivatives and borrowings in the accounts is easily reportable.
  2. Perform an annual review of custodians for separately managed accounts to ensure you can identify the accounts and assets under management with each custodian.
  3. If you operate a single advisory business through multiple legal entities, review whether an umbrella registration is best for your business.
  4. Start tracking and reviewing the additional identifying information that will be required on the Form ADV.
  5. Prepare and maintain comprehensive records supporting performance and rate of return calculations.
  6. Perform an annual review of the advisor’s books and records archive to ensure you are keeping the required documentation for the required duration.

Brendan Furey
Michael Conlon