What you need to knowThe 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 ProgramsUnder 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 RecommendationsAs 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 ReviewIn 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 PracticesTo 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.