November 20, 2020

Observations from OCIE’s Examinations of Investment Advisers: Supervision, Compliance and Multiple Branch Offices

On November 9th the Office of Compliance Inspections and Examinations (“OCIE”) distributed its latest Risk Alert. The focus of this Risk Alert related to Supervision, Compliance, and Multiple Branch Offices. Risk Alerts result from the SEC’s OCIE conducting Advisor examinations. The purpose of alerts are to provide guidance to Advisors regarding deficiencies identified through their examinations with the goal of assisting Advisors to ensure their policies and procedures are effective and appropriate given the nature of the deficiency.

Compliance and Supervision

Compliance Programs: The OCIE noted that with respect to their Compliance Programs “the vast majority of the examined advisers were cited for at least one deficiency related to the Compliance Rule.” This included:

  • Inaccurate policies: outdated information

  • Policies not being followed: not applying policies to all branches

  • Inadequate implementation: not receiving records required by policies and procedures

  • No enforcement


Custody of client assets: The OCIE also noted that Advisers did not have policies and procedures limiting the ability of supervised persons to process withdrawals and deposits in client accounts or changing of client address of record. By not having adequate policies and procedures in place some firms unknowingly had custody of client assets and would be required to follow the provisions of the Custody Rule. These included:

  • Comingling assets with client assets

  • Trustee for client accounts

  • General Partner to an advised limited partnership

  • Received client checks in branch offices and deposited these checks with the client custodian

  • Arrangements allowing for broad disbursement authority over client assets


Fees and expenses: Fees and expenses were also an area identified where Advisers did not have adequate controls in place to identify and remediate instances where undisclosed fees were charged to clients. The OCIE noted that most fee billing issues were related to the lack of oversight over fee billing processes, and in some cases, this resulted in overcharges to clients. These overcharges included:

  • Inaccurate fee calculations: misapplying tiered fee structures or incorrect valuations

  • Inconsistently applied fee reimbursements: refunds for prorated fees paid in advance

  • Charged fees different than the rates included in advisory agreements


Oversight and supervision of supervised persons: Deficiencies related to oversight and supervision of supervised persons included the following items. 

  • Failure to disclose material information, including disciplinary events

  • Portfolio management, including recommendation of mutual fund share classes that were not in the client’s best interest

  • Trading and best execution


It was also noted that the deficiencies were higher for branch office locations with personnel with higher risk profiles.


Advertising: Deficiencies related to advertising were identified as materials prepared by supervised persons located in branch offices as well as supervised persons operating under a DBA. Examples of deficiencies included:

  • Performance presentations omitting material disclosures

  • Superlatives or unsupported claims

  • Professional experience and/or credentials of supervised persons or the firm that were falsely stated

  • Third-party rankings or awards that omitted material facts regarding these accolades


Code of ethics: A number of firms were cited for the following deficiencies:

  • Complying with reporting requirements, including submitting transactions and holding reports less frequently than required by the rule or not submitting reports at all

  • Reviewing transactions and holding reports

  • Properly identifying access persons

  • Including all required provisions in their code of ethics, including review and approval process prior to a supervised person investing in limited or private offerings, initial and annual holdings report submissions, and quarterly transaction report submissions


Investment Advice

Portfolio Management: More than half of the advisers examined were cited for deficiencies related to portfolio management. These deficiencies included:

  • Oversight of investment decisions

    • Mutual fund share class selection and disclosure issues

    • Wrap fee program issues where advisers failed to adequately asses whether programs were in the best interest of clients, erroneously charging commissions, misrepresented or failed to have appropriate disclosures regarding their program (i.e., fees, trading away practices, and delegation of responsibility), failure to implement appropriate oversight of trading away practices, including monitoring whether sub-advisers traded away. Such practices typically caused clients to incur additional costs.

    • Rebalancing issues that for example created short term redemption fees from mutuals funds.

  • Disclosure of conflicts of interest

    • Certain advisers were cited where conflicts of interest were not fully and fairly disclosed, such as expense allocations that appeared to benefit proprietary fund clients over non-proprietary fund clients or failure to disclose financial incentives for advisers and/or their supervised persons to recommend specific investments.

  • Trading allocation decisions

    • Advisers were cited for lack of documentation demonstrating the adivers’ analysis regarding obtaining best execution for their clients, completing principal transactions where securities were sold from the firms’ inventory without prior client consent and inadequate monitoring of supervised persons’ trading, including improper allocation of block trade losses to clients rather than to the supervised persons.


Branch Office Observations

The staff provided a number of observations relating branch supervision and meeting the Compliance Rule. Advisor policies and procedures need to address all office locations and all types of relationships (i.e., independent contractor or employee; home office or branch office). Key areas for establishing appropriate procedures included:

  • Uniform policies regarding oversigt, monitoring and approval of advertising as it pertains to branch offices utilizing DBA websites

  • Centralized, uniform process to manage client fee billing

  • Centralized process for monitoring and approving personal trading activities for all supervised persons

  • Uniform portfolio management policies and procedures


The staff also noted that Advisors performed compliance testing and reviews of branch locations annually and in certain cases more frequently as needed. During the exams firms reviewed the following types of activities:

  • Portfolio management decisions

  • Designation of individuals within the branch office[s] to provide portfolio management monitoring

  • Consolidate the trading activities occurring within branch offices into the Adviser’s overall testing practices

  • Conducting reviews that did not solely rely on self-reporting by personnel


Advisers established policies and procedures relating to prior disciplinary events when hiring supervised persons and establishing periodic reviews of those individuals. Advisers also required compliance training for branch office employees on a semi-annual or at least annual basis.


The key take aways from this alert are to ensure that as a firm you have developed appropriate policies and procedures and to make sure that you are adhering to those policy and procedures. We encourage firms to at least annually complete a review of your existing documents to determine if any changes need to be made within those documents to account for any day to day changes that may have occurred within any particular compliance area.


Click here to read the full alert.

September 10, 2020

The 2021 Annual Amendment Process

As the summer is coming to an end, AdvisorAssist is beginning to prepare for the 2021 Annual Amendment season! 

We have created an Annual Amendment dashboard accessible via AdvisorCloud360®, our proprietary compliance technology. We have also implemented deadlines and reminders to ensure timely completion of each step in the process. This allows the team to thoroughly review and analyze responses well in advance of the regulatory deadlines.

Below is an outline of AdvisorAssist’s step by step process to assist with the management of the 2021 Annual Amendment. 

  1. Client Geography Review We request that firms complete a breakdown of clients (households) by each state. This enables us to proactively address any registration or notice filing needs and process any withdrawals to avoid paying unnecessary fees before year end.

  2. Annual Renewal Fees The registration of firms and its investment advisor representatives expires on December 31st of each year. To maintain these registrations, firms must pay all applicable renewal fees assessed on its preliminary statement to ensure continued eligibility to do business in the coming year. Preliminary statements will be initiated by FINRA in the second week of November. Once your firm’s preliminary statement is available, we communicate a breakdown of the fees owed along with instructions on funding your FINRA e-Bill account.

  3. Review Forms We request that firms confirm and update ADV information via review forms that are made available through the AdvisorCloud360® Annual Amendment Dashboard.

    1. Firm Information - General information about the firm, its owners, officers and personnel.

    2. Advisory Services - Information about the advisory services offered by the firm (eg. Investment management services, financial planning and consulting services, retirement planning services, etc.).

    3. Branch Office[s] - All locations, aside from the firm’s primary place of business, in which advisory services are performed.

    4. Website[s] and Social Media - Active websites (including those used for DBA names) as well as social media pages for the firm (not your supervised persons individual pages)

    5. Fees and Compensation - Advisory fees and billing methodologies for your various advisory services.

    6. Assets, Clients, and Accounts - Fiscal year end information related to the firm's assets under management, client breakdown, and discretionary and non-discretionary accounts.
Once all of the review forms are completed, the AdvisorAssist team conducts an analysis of current filings to ensure consistency across disclosures and amendments to ensure adherence to regulatory expectations.

If you’d like to obtain more information about AdvisorAssist's Annual Amendment process and how we can assist your firm, please contact us at  info@advisorassist.com.


January 13, 2020

Calculating Regulatory Assets Under Management


Let’s break down the key components to calculating RAUM:
(i) Qualifying a Securities Portfolio
An account is a securities portfolio if at least 50% of the total value of the account consists of securities*. For purposes of this 50% test, you may treat cash and cash equivalents (i.e., bank deposits, certificates of deposit, bankers acceptances, and similar bank instruments) as securities. You must include securities portfolios that are family or proprietary accounts, accounts for which you receive no advisory fee and accounts of non-United States persons.
For purposes of regulatory filings, Advisors must qualify and quantify the number of assets they manage and report them on Form ADV Part 1 and Part 2A. This calculation might be slightly different from other asset calculations you are used to. The calculation should include the securities portfolios for which you provide continuous and regular supervisory or management services (“Regulatory Assets Under Management” or “RAUM”).
Calculating Regulatory Assets Under Management
(ii) Quantifying a Securities Portfolio
Include the entire value of each securities portfolio for which you provide continuous and regular supervisory or management services over (see definition of continuous and regular below). If you provide continuous and regular supervisory or management services for only a portion of a securities portfolio, include as RAUM only that portion of the securities portfolio for which you provide such services. For example, exclude, the portion of the securities portfolio that consists of real estate or businesses whose operations you “manage” on behalf of a client but not as an investment.
RAUM Calculation Example
 
Consider the following example when calculating your value of RAUM.

The client's portfolio consists of the following:
*Under Section 2(a)(1) of the Securities Act, the term “security” is defined as any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
(iii) Determining Continuous and Regular Supervisory or Management Services
The following factors should be considered in evaluating whether you provide continuous and regular supervisory or management services to a securities portfolio:
The Advisory Contract. If you agree in an advisory contract to provide ongoing management services, this suggests that you provide these services for the account. Other provisions in the contract, or your actual management practices, however, may suggest otherwise.
Compensation. If you are compensated based on the average value of the client’s assets you manage over a specified period of time that suggests that you provide continuous and regular supervisory or management services for the account. If you receive compensation in a manner similar to either of the following, that suggests you do not provide continuous and regular supervisory or management services for the account:
  • You are compensated based upon the time spent with a client during a client visit; or
  • You are paid a retainer based on a percentage of assets covered by a financial plan.
Management practices. The extent to which you actively manage assets or provide advice bears on whether the services you provide are continuous and regular supervisory or management services. The fact that you make infrequent trades (e.g., based on a “buy and hold” strategy) does not mean your services are not “continuous and regular.”
Below are a few examples of instances that do NOT meet the definition of continuous and regular supervision:
  1. providing market timing recommendations (i.e., to buy or sell), but have no ongoing management responsibilities;
  2. providing only impersonal investment advice (e.g., market newsletters);
  3. making an initial asset allocation, without continuous and regular monitoring and reallocation; or
  4. providing advice on an intermittent or periodic basis (such as upon client request, in response to a market event, or on a specific date (e.g., the account is reviewed and adjusted quarterly)
(iv) Determining Discretionary vs Non-Discretionary RAUM
You provide continuous and regular supervisory or management services with respect to a securities portfolio if:
  1. you have discretionary authority over and provide ongoing supervisory or management services with respect to the account; or
  2. you do not have discretionary authority over the account, but you have ongoing responsibility to select or make recommendations, based upon the needs of the client, as to specific securities or other investments the account may purchase or sale and, if such recommendations are accepted by the client, you are responsible for arranging (i.e. communicating to the client) OR effecting the purchase or sale.
$6,000,000 -- stocks and bonds
$1,000,000 -- cash and cash equivalents
$3,000,000 -- non-securities (collectibles, commodities, real estate, etc.)

$10,000,000 -- Total Assets
Let’s run through some key questions to consider:
Qualify the securities portfolio: The account is a securities portfolio because securities as well as cash and cash equivalents (which you have chosen to include as securities) ($6,000,000 + $1,000,000 = $7,000,000) comprise at least 50% of the value of the account.
Quantify the securities portfolio:  The entire value of the account ($10,000,000) is included in the calculation of the adviser's total RAUM.
Determine continuous and regular supervisory or management: The entire account is managed on a discretionary basis and is provided ongoing supervisory and management services, and therefore receives continuous and regular supervisory or management services.
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