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The Top Five "Gotcha" Deficiencies Plaguing Asset Managers and How to Avoid Them

Posted by Joel S. Telpner on Mar 3, 2017 2:29:24 PM
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Let’s start with this caveat: as we all know, under the still-new Trump Administration, priorities may and are likely to change. Now that we got that off our chest, it is nevertheless not the time to sit back and wait. The SEC’s Office of Compliance Inspections and Examinations (OCIE) has just given us a list of potholes that investment advisers keep falling into. 

The OCIE identified the top five deficiencies that it sees over and over when conducting investment adviser examinations. This is what you need to know and what you need to do to avoid these deficiencies.

Compliance Rules

  • Use "off-the-shelf" compliance manuals at your own risk. Yes, you can start with one. Too often, however, off-the-shelf manuals simply restate the rules, subjecting your firm to needless complexity or requirements that do not apply to your specific businesses and practices. Make sure your policies and procedures are properly tailored to your individual business practices—what you do and how you do it.
  • Annual reviews are not only required but are just the starting point. A satisfactory annual review process must address both the adequacy of the adviser’s policies and procedures and the effectiveness of their implementation. This also means that concrete steps must be taken to address identified deficiencies.
  • What is worse than not having compliance policies and procedures? Failing to follow them. Failing to follow compliance policies is bad and failing to have adequate internal review processes to track the extent to which compliance policies and procedures are being followed is worse.
  • Too much dust on your compliance manual is more than a sign of bad housekeeping. Keep it current. Enough said.

Regulatory Filings

  • The dreaded Form ADV. Advisers know that ADVs are not particularly fun to complete and maintain. However, that is no excuse for inaccuracies. This is something that the SEC has a low tolerance for.
  • Don’t oversleep. ADVs must be amended, not just annually, but sooner if and when certain information becomes inaccurate. Otherwise, you will be back in the prior bullet point.
  • Don’t forget the other filing requirements. Advisers cannot forget to file, when required, Schedule 13D and 13G, Schedule 13F, Form PF, Form D and the various CFTC/NFA mandated forms. These filings are no less important than Form ADV.

Custody Rule

  • If you don’t think you have custody of your client’s cash or securities . . . think again. For example, simply having online access to a client account may meet the definition of custody if you have a right to withdraw funds or securities from your client’s account. Advisers must carefully review how the SEC defines “custody” and what the custody rule requirements are. 
  • Just don’t look at your own customer agreements. The staff of the Division of Investment Management recently determined that under the Investment Advisers Act custody rule, Rule 206(4)-2, an investment adviser may inadvertently have custody of client funds or securities because of provisions in a separate custodial agreement entered into between its advisory client and a third party custodian.
  • Independent accountants are your friends. Advisers that are deemed to have custody of client cash and securities must make sure that, unless an exemption is available, all such custody accounts are made available to the accountants who are required to perform surprise examinations.

Code of Ethics

  • This is different than a compliance policy. Advisers must have a separate code of ethics and that code must, among other things, identify access persons—those individuals responsible for reviewing personal securities transactions.
  • Ethics are “rules” of behavior. It is critical for advisers to have robust written standards of business conduct, appropriate procedures for complying with those standards and regular reporting and monitoring processes.
  • Proudly tell the world about your ethics policies. Advisers must disclose and describe their codes of ethics in their Form ADV filings.

Books and Records

  • What’s the point of following the rules if there is no record? It is not sufficient to simply have appropriate compliance policies and procedures. Advisers must keep, maintain and regularly update books and records covering a wide area of responsibilities such as trade records, general ledgers and customer account agreements.
  • Be a good housekeeper. Maintaining books and records is step one. Step two is making sure they do not have inaccuracies or inconsistencies and are regularly updated and revised. 


Just because a lot of asset managers experience these same common problems is not an excuse. In fact, now that the OCIE has published its list of "pet peeves," if you are examined and it is determined that you suffer from many of the same deficiencies, your ability to remedy them may be limited. The OCIE is indicating that its patience for tolerating these types of deficiencies is growing thin and that it is more likely to try to move quickly to seeking enforcement actions. In other words, you have been warned.

If you would like help in assuring that you stay out of the SEC’s "cross-hairs," please feel free to contact Joel Telpner in New York (jtelpner@sandw.com, 212.660.3015) or John Hunt in Boston (jhunt@sandw.com, 617.338.2961).

Topics: Deficiencies, Compliance Rules, Regulatory Filings, Code of Ethics, OCIE, Custody Rule, Books and Records

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