About our Contributors
ICS Group is a regulatory compliance consulting firm specializing in providing compliance support to the financial services and insurance industries. We help our clients comply with regulatory requirements and industry standards. Our clients include: registered investment advisers, private equity funds, hedge funds, mutual funds, broker-dealers, insurance companies and state pension plans. Our team of highly experienced compliance professionals know from first-hand experience what regulators are looking for, the industry standards that apply, and how to develop and implement cost-effective business-oriented solutions.
In addition to the annual publication of its exam priorities, the SEC’s OCIE issues periodic Risk Alerts which are aimed at promoting compliance by sharing the most frequently-cited deficiencies arising from its exam program.
To bring attention to issues that the SEC has concerns about and to foster increased compliance, the SEC issues Risk Alerts. Two Risk Alerts have been issued so far in 2018:
1. RISK ALERT – MOST FREQUENT ADVISORY FEE AND EXPENSE COMPLIANCE ISSUES IDENTIFIED IN EXAMINATIONS OF INVESTMENT ADVISERS (April 12, 2018)
This Risk Alert lists the most frequently observed compliance issues related to advisory fees:
The Risk Alert points out that the disclosure clients receive, especially regarding advisory fees and expenses, is critical to their ability to make informed decisions, including whether to engage or retain an adviser. Therefore, the failure by some investment advisors to adhere to the fee structures disclosed in their Form ADV and other governing documents may constitute a violation of the antifraud provisions of Investment Advisers Act of 1940 (the “Advisers Act”).
Key takeaways: Advisers should review their practices, policies, and procedures to ensure compliance with their advisory agreements and disclosures and their fiduciary duty to clients in light of the fee and expense issues noted in this Risk Alert.
2. RISK ALERT – MOST FREQUENT BEST EXECUTION ISSUES CITED IN ADVISER EXAMS (July 11, 2018)
As a fiduciary, an adviser who is responsible for selecting broker-dealers and executing client trades has the obligation to seek to obtain “best execution” of client transactions, taking into consideration the circumstances of the particular transaction. An adviser must execute securities transactions for clients in such a manner that the client’s total costs or proceeds in each transaction are the most favorable under the circumstances. Best execution requires consideration of the full range and quality of a broker-dealer’s services such as the value of research provided, access to management, execution capability, commission rate, financial responsibility, and responsiveness to the adviser. Failure to use best execution may constitute a violation of the Advisers Act.
This Risk Alert identifies the most frequently observed compliance issues related to best execution:
Examples include advisers who did not consider the full range and quality of a broker-dealer’s services such as financial responsibility and responsiveness to the advisor, or failure to solicit input from the firm’s traders or portfolio managers.
Examples include advisers that did not appear to adequately disclose the use of soft dollar arrangements or advisers that did not disclose that certain clients may bear more of the cost of soft dollar arrangements than other clients.
Examples include advisers that did not have any policies relating to best execution and advisers who did not assess the execution performance or their brokers.
Key takeaways: Investment advisors who employ directed brokerage – and even those who only use brokers to sell stock distributions – should reassess their policies, procedures and practices to ensure that they are complying with their best execution obligations.
The SEC is making a concerted effort to increase the transparency of its examination programs. Risk Alerts should be viewed as additional insight into the OCIE’s priorities and areas of focus. Investment advisors should study the Risk Alerts and act upon them to further refine their firm’s compliance program. Once a Risk Alert has been issued there really is no reason for any investment adviser to incur the same or similar deficiencies.
For help with this and all other compliance-related matters, contact ICSGroup. We’re here to help.