RIA Compliance and Practice Management Blog

SEC RIA Compliance Risk Alert Flags Multi-Branch Office Risks

Posted by RIA in a Box

Nov 10, 2020 5:04:50 PM

SEC investment adviser risk alert on credential stuffing cyber attacksOn November 9, 2020, the Securities and Exchange Commission (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) released a new risk alert with new information pertaining to a series of exams conducted that focused on registered investment adviser ("RIA") firms operating from numerous branch offices and with operations geographically dispersed from the adviser’s principal or main office, better known as the “Multi-Branch Initiative.” According to the SEC, "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."

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The Multi-Branch Initiative examined nearly 40 advisory firm main offices combined with one or more branch office examinations of each firm. "These advisers collectively managed approximately $110 billion in assets for about 185,000 clients, the majority of whom were retail investors. Most firms selected for examination under the Initiative conducted their advisory business out of 10 or more branch offices," the risk alert explained further. 

The Initiative primarily focused on two main compliance areas:

  • Compliance Programs and Supervision
    • Compliance with certain rules, such as the "Code of Ethics" and "Custody Rule"
    • Consistency with fiduciary obligations, such as those related to fees, expenses, and advertising
  • Investment Advice
    • Oversight of investment recommendations, both within specific branch offices and across all of the advisers' branch offices
    • Management and disclosure of conflicts of interest
    • Allocation of investment opportunities

Upon completion of the exams, OCIE found several deficiencies across the board with the most common being the lack of consistency of policies and procedures between branch offices. Out of the nearly 40 RIA firms examined, half of them had policies and procedures that were:

  1. inaccurate or contained outdated information, such as references to entities that no longer existed and personnel that had changed roles and responsibilities; 
  2. not consistently applied in all branch offices;
  3. inadequately implemented because, among other things, the compliance department did note receive records called for in the policies and procedures; or 
  4. not enforced. 

As a result, the SEC believes that "the branch office model may pose certain risk factors that advisers should consider in designing and implementing their compliance programs and in supervising personnel and processes occurring in branch offices. These risks may be heightened when the main and branch offices have different practices. For example, advisers that do not monitor, review, and/or test their branch office activities may not be aware that the compliance controls they have adopted are not effectively implemented or do no appropriately address the intended risks and conflicts in these remote locations."

However, there were also several practices that SEC examination staff observed and listed in the risk alert that firms may find helpful in their compliance oversight efforts. Below is a list of these practices recommended by SEC staff that could be beneficial when implemented at your firm:

  • Advisers adopted and implemented written compliance policies and procedures that: (1) were applicable to all office locations and all supervised persons – regardless of whether these individuals were independent contractors or employees of the adviser; (2) include unique aspects associated with individual branch offices; and (3) specifically address compliance practices necessary for effective branch office oversight.
    • Uniform policies and procedures regarding main office oversight for monitoring and approving advertising
    • Centralized, uniform processes to manage client fee billing
    • Centralized processes for monitoring and approving personal trading activities for all supervised persons located in all office locations. 
    • Uniform portfolio management policies and procedures, portfolio management systems, or both, across all office locations.
  • Advisers performed compliance testing or periodic reviews of key activities at all branch offices at least annually, with some firms conducting reviews more frequently.
  • Advisers established compliance policies and procedures to check for prior disciplinary events when hiring supervised persons and periodically confirming the accuracy of disclosure regarding such information.
  • Advisers required compliance training for branch office employees.

In recent years, branch office supervision has been a frequent SEC compliance focus area and we expect this focus to only continue with the continued emergence of more investment advisory firms establishing a national footprint with branch offices located across the country.

Be sure to check back soon as we continue to provide updates on relevant RIA regulatory compliance focus areas.

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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.

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