SEC Fort Worth Regional Office (FWRO) Regional Deficiency Summary for 2017: Noted 11 deficiency areas based on 139 exams.
- Compliance Program: 50% of exams included this finding
- Anti-Fraud Provisions: 33% of exams included this finding
- Amendments to Application for Registration: 34% of exams included this finding
- Inadequate Compliance Policies and Procedures
- Investment Adviser Code of Ethics
- Custody of Clients’ Cash and Securities
- Written Disclosure Statements
- Annual Review of Compliance Program
- Inadequate implementation of or adherence to Compliance Program
- Material Misstatements
- Books & Records
Compliance Program (Rule 206(4)-7): 50% of the exams included this deficiency
- Procedures often weren’t tailored.
- Insufficient resources devoted to compliance.
- CCO wearing other hats. Prefer the CCO report directly to the CEO and have independence.
- Required to review program annually, but consider interim reviews.
- A weak compliance program results in the following potential violations:
- Failure to Tailor P&P Manual, Failure to Follow P&P, Inadequate P&P, Inadequate Testing, No Annual Review, and CCO lack of competence and knowledge of the IA Act.
Anti-Fraud Violations (Section 206 of the Advisers Act): 33% of the exams included this deficiency
- Fiduciary duty to eliminate or disclose all conflicts of interest. (SEC vs. Capital Gains Research)
- IAR can’t disclaim fiduciary duty by switching hats (IAR–>RR). (In the Matter of Lawrence Levine)
- Advisory Fee Calculations: FWRO will review this area and it may be a National Priority in 2018
- Overbilling: Specifically related to layered/tiered billing.
- Double Billing: Advisory plus brokerage fees on private offerings.
- Disclosure of Conflict: Omission causes actual disclosures to be inadequate or misleading.
- Disclosure of Discretion: Sell w/o commission or exclude from advisory fee calculation.
- Examples of Impact: One firm sold over $300 million in alternative products to advisory clients. Another firm overbilled 5,000 clients $850,000 in excess advisory fees. Another exam found systematic overbilling that resulted in a refund of over $750,000 to clients.
Amendments to Application for Registration – Form ADV (Rule 204-1): 34% of the exams included this deficiency. Amend at least annually, or more frequently as necessary, based on instructions.
FWRO Focus Areas for 2018
- Adviser Fee Calculations: This may be a National Exam Priority in 2018.
- Contingency Planning (Business Continuity, Disaster Recovery and Succession Plans): FWRO will focus on the firm’s process for addressing contingencies and responding to disasters (e.g., fire, flood, hurricanes, cyber-attacks, etc.). Plans should be detailed, comprehensive and unique to each type of disaster. Small firms should consider establishing a succession plan.
- Securities-Based Loans/Lending
- Initial Coin Offerings: This will be a National Exam Priority in 2018.
Top 10 Investor Alerts/Bulletins in 2017 (Refer to SEC Investor Bulletin issued 12/2017)
- Initial Coin Offerings (Investor Bulletin, 7/25/2017)
- Public Companies Making ICO-Related Claims (Investor Alert, 8/28/2017)
- Stock Recommendations on Investment Research Websites (Investor Alert, 4/10/2017)
- Robo-Advisers (Investor Bulletin, 2/23/2017): This was a 2017 National Exam Priority
- Fraudsters Targeting Federal Government Employee Retirement Plan Participants (Investor Alert, 7/31/2017)
- Understanding Order Types (Investor Bulletin, 7/12/2017)
- Protecting Your Online Investment Accounts from Fraud (Updated Investor Bulletin, 4/26/2017)
- Crowdfunding for Investors (Updated Investor Bulletin, 5/10/2017)
- Celebrity Endorsements (Investor Alert, 11/1/2017)
- New T+2 Settlement Cycle (Updated Investor Bulletin, 8/22/2017): Effective 9/5/2017.