On November 9, 2020, the Office of Compliance, Inspections and Examinations (OCIE) issued a Risk Alert in connection with observations from OCIE’s examinations of investment advisers: supervision, compliance and multiple branch offices. OCIE conducted a series of examinations that focused on SEC-registered investment advisers operating from numerous branch offices and with operations geographically dispersed from the adviser’s principal or main office (“Multi-Branch Initiative” or “Initiative”). This Initiative focused on, among other things, the assessment of the compliance and supervisory practices relating to advisory personnel working within the advisers’ branch offices. This Risk Alert contains observations resulting from the examinations under the Initiative, including nearly 40 examinations of advisers’ main offices combined with one or more examinations of each adviser’s branch offices. Most firms selected for examination under the Initiative conducted their advisory business out of 10 or more branch offices. The Risk Alert can be reviewed in its entirety at: https://www.sec.gov/ocie/announcements/risk-alert-multi-branch.
Some key takeaways:
Advisers did not have policies and procedures that limited the ability of supervised persons to process withdrawals and deposits in client accounts, change client addresses of record, or do both.
Advisers (in most instances unknowingly) had custody of their clients’ assets due to a variety of practices, including instances where the adviser: (1) received client checks in branch offices and deposited these checks with the client custodians; and/or (2) had various arrangements in place that gave it broad disbursement authority over client assets.
Advisers overcharged fees in a variety of ways, such as when the adviser: (1) misapplied tiered fee structures or employing incorrect valuations for the calculations; (2) charged fees on assets that were to be excluded from advisory fees.
Wrap fee program issues. Advisers failed to adequately assess whether programs were in the best interests of clients, erroneously charged commissions, misrepresented or failed to have appropriate disclosures regarding their wrap fee program (i.e., fees, trading away practices, and delegation of responsibility), or failed to implement appropriate oversight of trading away practices, including monitoring whether sub-advisers traded away. These practices typically caused clients to incur additional costs, such as ticket charges and other fees. Rebalancing issues. Advisers implemented automated rebalancing of accounts that caused clients to incur short-term redemption fees from mutual funds. Certain advisers did not consider whether these automated processes, which caused clients to pay additional fees, were in the best interest of the clients.