Investment advisers registered with the U.S. Securities and Exchange Commission (SEC) may use a variety of business and organizational models, which may include structures with one or more branch offices. In announcing its primary examination priorities for 2016,1 the SEC’s Office of Compliance Inspections and Examinations (OCIE) indicated that it will conduct an ongoing review of how SEC-registered investment advisers supervise their investment adviser representatives in branch offices, as part of a larger continuing focus on “matters of importance to retail investors.”
In a Risk Alert published on December 12, 2016,2 OCIE provided information regarding its Multi-Branch Adviser Initiative (Initiative). Specifically, the Risk Alert indicates that the Initiative will focus on the implementation of compliance programs relating to branch offices, as well as “the process by which investment advice, including the formulation of investment recommendations and the management of client portfolios, is provided to advisory clients from supervised persons located in branch offices.”
Compliance Programs
Pursuant to rule 206(4)-7 under the Investment Advisers Act of 1940 (Advisers Act), advisers are required to “adopt and implement written policies and procedures reasonably designed to prevent violation” of the Advisers Act by investment advisers and their supervised persons. The Risk Alert indicates that the OCIE staff will conduct interviews and review advisory records to assess, among other matters:
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The implementation of compliance policies at principal and branch offices;
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The quality of advisers’ supervision structures;
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The role and empowerment of advisers’ compliance personnel; and
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The accuracy of information reported by advisers in filings, including Form ADV.
The Risk Alert further notes that the OCIE staff may focus attention on:
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Advisers’ calculation of fees and other expenses;
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Advisers’ review of branch office advertisements;
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Implementation of advisers’ codes of ethics, including identification of access persons in branch offices; and
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The role of branch office personnel in ensuring compliance with the Custody Rule.3
Investment Recommendations
In the Risk Alert, OCIE refers to investment advisers’ fiduciary duty to act in their clients’ best interests and to identify and disclose material conflicts of interest. According to the Risk Alert, to review how this duty is fulfilled in branch offices, the OCIE staff will focus on:
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Advisers’ oversight of investment recommendations made by supervised persons at the branch level;
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Conflicts of interests arising in connection with branch office activities and personnel; and
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The manner in which supervised persons at branch offices allocate investment opportunities among their clients.
Conclusion
Taken together, OCIE’s priorities and areas of inquiry may suggest that the staff is concerned that compliance policies and supervision structures established at an adviser’s principal office may not be fully or appropriately implemented in branch offices, particularly in the areas noted above. Advisers with multi-branch structures may find it useful to review their supervisory and compliance procedures as they apply to branch offices, as well as their program for testing and documenting their effectiveness.
