Lori Richards, Director of the SEC’s Office of Compliance Inspections and Examinations, recently gave a speech at the Investment Adviser Compliance Summit and provided some interesting insights into the current SEC examination process and lessons learned from exams completed in 2005. Based on the approximately 1500 SEC examinations completed last year, these five items were cited as the most common regulatory deficiencies of investment advisors.
1. Lack of Disclosure – This category of deficiencies involved failures to provide proper disclosures within the ADV such as the following: (a) undisclosed conflicts of interest; (b) inaccurate descriptions of a firm’s business operations; (c) lack of an explanation that directed brokerage may not result in best execution for the client; and (d) omitted or inaccurate statements regarding the exercise of discretionary authority and custody of client funds and/or securities.
2. Portfolio Management – Issues discovered by the SEC included the failure to implement internal controls intended to ensure investments selected for clients are suitable and meet the client’s objectives. Failure to properly document and keep records concerning portfolio management was also frequently cited.
3. Personal Trading by Advisor Employees – The SEC noted that failing to implement a code of ethics is still a major weakness for many advisor firms even though it is required under a specific SEC rule. Investment advisors were also cited for failing to implement procedures to monitor employee personal trading and preventing employees from placing their personal trading interests ahead of the firm’s clients.
4. Performance Calculations – Investment advisors must implement procedures designed to calculate and present past investment performance in an accurate and honest fashion. Problems cited by the SEC included overstated performance results, not disclosing how performance results were calculated, using testimonials, and advertising in a misleading manner.
5. Brokerage Arrangements & Execution – Investment advisor firms were cited for not implementing or having inadequate procedures designed to ensure the firm obtains best execution for its clients. Other issues included not disclosing that client money was used to pay referral parties and other goods and services that benefited the firm.
These findings are an excellent roadmap for issues that every investment advisor firm should address in 2006. Please let us know if your firm is interested in retaining RIA Compliance Consultants to conduct a mock regulatory examination or assist your firm with its new annual review obligation.
Posted by Bryan Hill
Labels: Regulatory Inspections
