Three CCS professionals – Jocelyn Dalkin, Jason Ewasko and Bridget Garcia – recently attended the IA Watch’s 21st Annual IA Compliance: The Full 360° View East conference in Washington. If you were unable to attend, you should review their summary of the most significant sessions including Dan Kahl’s summary of Enforcement Priorities, a top panel’s views on SEC rulemaking, and more specialized sessions on cybersecurity and custody. If you want more information, feel free to contact Jo, Jason or Bridget
In recent testimony before Congress, SEC Chairman Jay Clayton reported that the SEC examined approximately 15% of all investment advisers in fiscal 2017, a 40% increase over the prior year. Mr. Clayton said that the SEC achieved these results through the reallocation of resources, advancements in technology, and “other efficiencies.” He advocated for continuing to increase investment adviser coverage levels by requesting 24 additional positions in his 2019 budget request.
OUR TAKE: The SEC still falls short of FINRA who claims to examine 40% of broker-dealers per year. Perhaps, Chairman Clayton should reconsider requiring third party compliance reviews, a revenue-neutral policy idea, championed by former Republican Commissioner Dan Gallagher. Regardless, the chance of an exam continues to increase every year.
The SEC has commenced enforcement proceedings against a fund manager and its principal/CCO for ignoring exam deficiencies about its compliance program and other violations. The SEC examined the respondents in 2010 and 2014 and noted several compliance deficiencies, which the SEC asserts the respondents ignored. The SEC charges the dual-hatted principal with failing to perform any work on the compliance program, adopting a stock manual that was not properly tailored to the business, or conducting any compliance review. The SEC also faults the respondents for charging compliance costs to the funds. The SEC additionally charges undisclosed conflicts of interest, misrepresentations, and valuation issues.
OUR TAKE: The SEC doesn’t always give you a second chance to fix cited deficiencies. But when they do and you don’t, expect an enforcement action. Also, this is another example of the failure of the dual-hatted CCO model, where an executive ignored his compliance responsibilities. Penny wise and pound foolish.
The SEC’s Office of Compliance Inspections and Examinations has issued a Risk Alert listing the 5 most frequently identified compliance topics: weak compliance programs, insufficient and late filings, violations of the custody rule, Code of Ethics compliance deficiencies, and books and records. OCIE highlights specific compliance problems including untailored “off-the-shelf” manuals, weak or absent annual reviews, and failure to follow procedures. OCIE cited Form ADV and Form PF failures including inaccurate disclosures and late filings. Other common deficiencies include failures (i) to follow the custody rule due to lack of knowledge about its requirements, (ii) to identify access persons, and (iii) to maintain complete and accessible books and records.
OUR TAKE: Compliance with the Advisers Act is not intuitive. It requires a thorough knowledge of the specific requirements of the statute and all its rules. Firms must hire a regulatory professional or a compliance services firm to assist with compliance or face significant exam deficiencies or an enforcement action.