RIA Compliance and Practice Management Blog

SEC Announces Examinations of RIA Firms with Multiple Branch Offices

Posted by RIA in a Box

Dec 14, 2016 6:09:50 PM

SEC to examine supervisory compliance of RIA firms with multiple branch officesEarlier this week, the Securities and Exchange Commission ("SEC") Office of Compliance Inspections and Examinations ("OCIE") staff issued a new registered investment adviser ("RIA") regulatory risk alert announcing an initiative to audit RIA firms that operate from multiple office locations. The SEC notes that " the use of a branch office model can pose unique risks and challenges to advisers, particularly in the design and implementation of a compliance program and the supervision of people and processes in branch offices." This announcement comes after the SEC earlier this year listed branch office supervision as a 2016 investment adviser examination priority

Download Our Free How to Prepare for an RIA Regulatory Exam Checklist

As the SEC highlights, more investment advisory firms continue to implement a business model with multiple branch office locations. Some such RIA firms are started on day one with the goal to recruit advisors and open offices across the country while others have established a number of office locations over time through a series of acquisitions. There is no prohibition or limitation on the number of branch offices that an advisory firm may have, however many RIA firms operating under such a model have not established the proper supervisory policies, procedures, and monitoring systems to ensure that staff at branch offices are conducting business in a compliant manner. As RIA compliance consultants, we want to remind all investment advisory firm principals to constantly review and modify compliance policies and procedures to ensure they sufficiently address and mitigate the current risk areas of the firm. Before a firm establishes its first branch office, a number of new policies and procedures need to be implemented to ensure proper supervision.

This latest risk alert also comes shortly after the SEC recently announced two other "supervision" related initiatives including a September 2016 risk alert which outlined an initiative to examine "compliance oversight and controls of registered investment advisers that have employed or employ individuals with a history of disciplinary events, including individuals that have been disciplined or barred from a broker-dealer." In addition, as part of the SEC's new Form ADV filing requirements effective in October 2017, RIA firms with multiple branch offices will now need to disclose additional information regarding the firm's 25 largest offices.

As part of this latest initiative, targeted SEC audits will focus on two key areas of compliance: 

  • Compliance Program: The staff notes that there will be particular focus on:
    • Implementation of policies and procedures in the main and 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 the adviser's filings regarding branch offices, including Form ADV, as compared to actual practices

The last focus area listed above is of particular interest as the SEC staff is making it clear that it expects an RIA firm to accurately detail branch office information on the Form ADV. Rapidly growing RIA firms will need to be vigilant to ensure that all Form ADV filing information is kept up to date and that all relevant branch office information is fully disclosed. 

In addition, the SEC states it will also pay particular attention to the firm's calculation of advisory fees and other expenses, compliance with the Custody Rule, review of advertising materials created and distributed by branch offices, and implementation of the firm's Code of Ethics including personal security transaction monitoring and review and proper identification of access persons at branch offices.

  • Investment Recommendations: In particular, "the staff will review 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 office," and also "focus on policies and procedures and supervisory controls designed to address specific risks presented in a branch office model regarding the provision of advisory services to clients, such as the identification of potential conflicts of interest and the level of autonomy supervised persons have in providing advice." 

In particular, the SEC states it will also focus attention on the firm's supervision of investment recommendations made to clients at branch offices, proper identification, management, and disclosure of conflicts of interest that arise at branch offices, and how branch office trading activity and allocation is monitored.

We recommend that all RIA firm principals review this latest risk alert in detail as there are a number of observations that are relevant to the supervision practices of all investment advisory firms with or without branch offices.

Download Our Free RIA Cybersecurity Compliance Checklist

 

Topics: RIA Operations, RIA Compliance

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

RIA Compliance & Practice Management

Stay up to date on the latest RIA compliance, operations, and technology topics.

Hear from industry experts as they keep you up to date on the latest regulatory developments and practice management topics.

Subscribe to Email Updates

Recent Posts

POSTS BY TOPIC

cta-ria-compliance

cta-ria-operations

cta-ria-technology