OCIE: Exam Observations

OCIE: Exam Observations

04 December 2020

Main Contributor: Katie Mogan, IACCP® Vice President, Senior Compliance Consultant


The SEC has blessed us once again with another Risk Alert.  This time, they are providing us with a summary of their findings from a series of focused exams of advisors with branch offices. We intentionally left out the term “branch office” in the title of this article, because many of their findings are relevant to any advisory firm, and we didn’t want the title to prevent you from reading further. There are, however, some specific risks when an advisory firm has branch offices, which we will detail out later. It’s also interesting to note that the summary of these exam findings is from an initiative of exams focused on branch offices that concluded in 2018…over two years ago. Clearly, they felt these items are still relevant today.

The Multi-Branch Initiative, which resulted in this summary of findings, focused on the following two main areas:

  1. Compliance programs and supervision
  2. Investment advice

Focus Area #1: Compliance Programs and Supervision

This is a broad topic that covered the advisor’s annual review, oversight of services and branch office activities, compliance with the Code of Ethics, compliance with the Custody Rule, and consistency with fiduciary obligations as it relates to fees, expenses, and advertising.  In their review, the SEC found the most common deficiencies included:

  1. Policies and procedures that were inaccurate, not applied consistently, inadequately followed, or not enforced.
  2. Advisors that had custody, because they were not aware, or they did not follow the requirements of the Custody Rule. Some examples in which advisors had custody:
    • Commingled assets with clients
    • Trustee on client accounts
    • General arrangements in which broad disbursement authority was granted to the advisor
  3. Lack of oversight of the billing practices, where clients were overcharged.
  4. Supervision deficiencies, which were heightened with advisors that employed individuals with a history of disciplinary events, specifically:
    • Failure to disclose when individuals had access to material non-public information
    • Recommending mutual fund share classes not in the client’s best interest
    • Not enforcing the firm’s trading and best execution procedures
  5. Errors and omissions in the advisor’s marketing materials, particularly:
    • Performance presentations that omitted required disclosures
    • Superlative or unsupported claims
    • Falsely stated professional experience and/or credentials
    • Third-party rankings that omitted required disclosures
  6. Code of Ethics violations, with the examples provided including:
    • Either submitting late or not submitting at all, the required transaction and holdings reports
    • The CCO or designee not reviewing the transaction and holdings reports
    • Not properly identifying Access Persons (omitting people that should be Access Persons)
    • Not addressing all required provisions of Rule 204A-1 in the advisor’s Code of Ethics

Focus Area #2: Investment Advice

In this initiative, more than half of the advisors examined were cited for deficiencies in their portfolio management process. Examples of what the SEC observed included:

  1. Improper investment recommendations
    • Advisors purchased mutual fund share classes that charged 12b-1 fees instead of the lower-cost equivalent and benefited from this recommendation financially, which created an additional conflict that wasn’t disclosed.
    • When offering a wrap fee program, advisors failed to assess whether they were in fact in the client’s best interest and properly disclosed, including the fees and conflicts.
    • Advisors rebalanced accounts automatically that caused short-term redemption fees from mutual funds, failing to assess whether this automation was in the client’s best interest.
  2. Failure to disclose conflicts of interest, that benefited one client over another and/or provided a financial incentive to the advisor.
  3. Failure to document review of best execution.
  4. Executing principal transactions prior to the client’s consent.
  5. Inadequate monitoring of trading activity.

Risks Specific to Branch Offices

When you have multiple offices, or even people working from home, there is a heighted risk of the remote individuals developing practices that deviate from the firm’s required policies and/or rules. It’s important to conduct a review of those practices, along with proper supervision, to ensure that the multiple offices, or temporary remote work locations, are operating within their requirements.

What Did the SEC Recommend?

OCIE actually provided some recommendations in this risk alert, which were an accumulation of the practices they found to be sufficient for branch offices.

  1. Centralizing policies and procedures – have one set of policies that applies to everyone, including employees, independent contractors, and branch offices. Centralize practices, such as:
    • Client billing
    • Review and approval of marketing materials
    • Reporting and review of personal trade activity
    • Centralize client trade activity
  2. Tailor your policies and procedures – address the unique aspects to a particular branch office or independent contractor.
  3. Test practices at least annually, including those completed in branch offices.
  4. Conduct background checks and increase supervision or limit responsibility for those with a history of disciplinary activity.
  5. Conduct regular training with staff.

What is SCS’ Perspective?

First of all, it’s always helpful to familiarize yourself with OCIE’s findings, as it might help you identify any weaknesses in your firm’s compliance program. Second, the key to a successful compliance program includes the following:

  1. Have policies and procedures that are practical, easy to understand, and consistent with your actual practice. This requires you to review and update on a regular basis.
  2. Develop an annual review process that provides regular intervals of testing and analysis for all areas of the firm, including those mentioned above. If you are continuously testing and reviewing your process, you can identify any weaknesses and correct them before an issue arises.
  3. Train your staff…regularly and consistently! Make sure they understand what they are required to do. The policies are only as good as the people who follow them.
  4. Ask questions! Don’t assume that everyone knows what they are doing or that they have voluntarily told you everything. They might not know that accepting a check and depositing it on behalf of the client could cause the firm to have custody. Bring these topics up during training sessions to evoke discussion or even consider interviewing key staff on a periodic basis.
  5. Ask for help! It is important that you have the resources you need to build, maintain, and implement a successful compliance program.


In this current work-from-home climate, OCIE’s Exam Findings in this Risk Alert actually come at a beautiful time. This is a welcome reminder to not remain complacent with your policies and procedures or business continuity plan and march on with business as usual. These multiple branch office findings can be applied across various situations and serve as a guide to help tailor your supervision and firm policies in the year ahead.

Filed under: SEC IM GuidanceSEC Risk Alert