United States: OCIE Highlights Frequent Topics For Compliance Deficiencies For Investment Advisers

On Feb. 7, 2017, the Securities and Exchange Commission's (SEC's) Office of Compliance Inspections and Examinations ("OCIE") published a risk alert outlining the five most frequent compliance topics identified in deficiency letters sent to SEC-registered investment advisers.

The information is intended to assist advisers as they prepare for their compliance reviews. Therefore, advisers should review their compliance programs and related policies and procedures with particular focus on the topics noted in the alert and make improvements as necessary.

Specifically, OCIE identified deficiencies or weaknesses in the following five areas:

  1. Rule 206(4)-7 under the Investment Advisers Act of 1940 (the "Advisers Act"), also known as the "Compliance Rule." 
  2. Required regulatory filings. 
  3. Rule 206(4)-2 under the Advisers Act, known as the "Custody Rule." 
  4. Rule 204A-1 under the Advisers Act, or the "Code of Ethics Rule." 
  5. Rule 204-2 under the Advisers Act, known as the "Books and Records Rule." 

Compliance Rule

The Compliance Rule requires an adviser to meet several regulatory conditions in connection with its business of rendering investment advice to clients. These include:

  1. Adopting and implementing written policies and procedures reasonably designed to prevent the adviser's violation of the Advisers Act and related SEC rules. 
  2. A review of the adequacy of the policies and procedures and the effectiveness of their implementation on a basis no less frequently than annually. 
  3. Designating a chief compliance officer ("CCO"), who is responsible for administering these compliance policies and procedures. 

OCIE staff provided some possible instances of deficiencies or weaknesses with respect to the Compliance Rule. For example, a deficiency could arise as a result of a compliance manual that is not reasonably tailored to the adviser's specific business practices, including sections intended to address individualized practices such as particular investment strategies, types of clients, trading practices, valuation procedures and advisory fees. As a result, advisers should be aware that "off the shelf" compliance manuals may not be adequately tailored to address their individual business practices.

Regulatory Filings

This compliance topic related to the accurate completion and timely filing of certain regulatory submissions advisers must provide to the SEC. The alert mentioned various filing requirements, such as advisers' annual Form ADV update, Form PF and Form D filings. In this regard, OCIE indicated that it has identified deficiencies or weaknesses that included inaccurate disclosures in Form ADV filings, untimely Form ADV amendments, and incorrect or untimely Form PF and Form D filings.

Custody Rule

The Custody Rule applies to advisers with custody of client cash or securities, and the rule includes several requirements designed to protect client assets from unlawful activities or financial problems of the adviser. Specifically, an adviser is considered to have custody if it or its related persons directly or indirectly hold client funds or securities, or have any authority to obtain possession of them, such as an adviser serving as the general partner, managing member or other comparable position of a pooled investment vehicle.

OCIE noted the following deficiencies or weaknesses with respect to the Custody Rule: advisers who did not recognize that they may have custody due to online access to client accounts; advisers who obtained surprise examinations that failed to meet the rule's requirements due to the failure to provide the accountants with a complete list of accounts over which the adviser had custody or otherwise failed to meet the rule's requirements (e.g., the surprise examinations may not have been conducted on a "surprise" basis); and advisers that did not recognize they may have custody as a result of certain authority over client accounts (e.g., advisers that were granted powers of attorney over a client's account authorizing them to withdraw client cash and securities have custody of that account's assets).

Code of Ethics Rule

The Code of Ethics Rule requires an investment adviser to adopt and maintain a code of ethics, which must meet several requirements, including establishing a standard of business conduct that the adviser requires of all its supervised persons; requiring an adviser's "access persons" to periodically report their personal securities transactions and holdings to the adviser's CCO or other designated persons; and requiring access persons to obtain the adviser's preapproval before investing in an IPO or private placement.

Deficiencies or weaknesses with respect to the Code of Ethics Rule identified by OCIE included not identifying all of an adviser's access persons, omitting required information in the code of ethics, untimely submission of transactions and holdings by access persons, and a failure of the adviser's Form ADV to describe the code of ethics and indicate that the adviser's code of ethics is available to clients upon request.

Books and Records Rule

Finally, the Books and Records Rule requires advisers to make and keep certain books and records relating to their investment advisory business, including typical accounting and other business records as required by the SEC.

Deficiencies or weaknesses noted with respect to the Books and Records Rule included:

  1. The failure to maintain all required records. 
  2. Books and records that are inaccurate or not updated.
  3. Inconsistent recordkeeping practices (e.g., some advisers maintained contradictory information in separate sets of records).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Morrison & Foerster LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Morrison & Foerster LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions