SEC Issues Risk Alert on Top Five Problem Areas in Investment Adviser Examinations

by Karen Wackerman

For investment adviser firms, an audit by the Securities and Exchange Commission or state regulators can be cause for anxiety. Regardless of how carefully a firm’s chief compliance officer adheres to regulations, deficiencies might be found by the examiners. The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) recently reported on the five most frequent compliance problems found during examinations of investment advisers over the past two years, based on its review of deficiency letters sent to examinees.[1]  The five problem areas – compliance programs, regulatory filings, custody, code of ethics and books and records – are familiar territory for investment advisers but can still give rise to problems. The OCIE report is instructive for investment advisers who hope to have a smooth examination when the SEC comes knocking. If your firm is a Connecticut state-registered adviser, it is likely that the Department of Banking (“DOB”) would have similar concerns when it conducts examinations, as its compliance requirements are similar to those of the SEC.[2]

Compliance Programs

The Investment Advisers Act Rule 205(4)-7 sets forth specific requirements for compliance programs that all SEC-registered advisers must have. The OCIE examiners found several problems with the compliance programs of some of the investment advisers they examined.

– The examiners found that some compliance manuals were not reasonably tailored to the investment adviser’s business practices. Advisers often buy “off-the-shelf” manuals but fail to revise them to fit how they actually do business, making many of the policies and procedures irrelevant to them. In addition, some manuals were not updated to reflect changes in the law, changes in personnel of the investment adviser, or new policies.

– Some advisers failed to annually review their compliance policies and procedures, or reviewed them but did not address problems identified in the review.  In fact, some advisers were not following their own policies and procedures.

Action Items:

  • Make sure that your compliance manual accurately describes your firm’s actual policies and procedures and update it periodically.
  • Conduct an annual review of your firm’s compliance program and address any problems that you identify.
  • Make sure that your firm is following the policies and procedures established by its compliance program.

Regulatory Filings

The examiners found that some advisers provided inaccurate disclosures on their Form ADV annual amendments, and others did not promptly file ADVs when a material event occurred. Advisers to funds with assets over $150,000,000 are required to file Form PF; examiners found that some advisers with this obligation prepared the form inaccurately or incompletely or filed it late. Advisers to funds relying on Regulation D for an exemption from a public offering, in their capacity as organizers of the funds, may be required to file a Form D on behalf of the fund.  The examiners found that some advisers filed the Form D late or that the forms were inaccurate or incomplete.

Action Items:

  • Calendar your firm’s deadlines for form filings and plan ahead to ensure filing is timely.  Ensure that forms are completed and the information is correct.


The SEC’s Custody Rule,[3] created in the wake of the Madoff scandal, requires that advisers with custody of a client’s cash or securities comply with certain requirements in order to ensure the safety of clients’ assets.

Failure to Identify Custody.  Examiners found that some advisers did not realize that they had custody of client assets due to their online access to clients’ accounts and their ability to withdraw funds and securities from the accounts. Certain advisers did not recognize that they had custody due to broad powers of attorney that allow them to withdraw client cash or securities, or because they are trustees of clients’ trusts or general partners of funds.

Improper Use of Surprise Examinations. The Custody Rule requires that independent public accountants conduct surprise examinations of investment advisers in certain circumstances. OCIE’s examiners reported that some advisers did not provide the accountants with all the necessary information to conduct the examination and file the required Form ADV-E. In addition, some examinations were not being done on a “surprise” basis.

Action Items:

  • Periodically review the level of control that your advisers have over client funds and securities in light of the Custody Rule to ensure that all controlled assets are appropriately protected pursuant to that Rule. Ensure that your accountants have all the information they need to conduct their surprise examinations, and that the examinations are done on a truly “surprise” basis.

Code of Ethics Rule

The SEC requires that each SEC-registered investment adviser adopt and maintain a code of ethics, which must contain certain provisions.[4] The examiners found deficiencies particularly in the requirement that the adviser’s “access persons” (which includes employees, partners and directors) periodically report their personal securities transactions and holdings to the adviser’s chief compliance officer. Some advisers did not identify all of their access persons. Some did not require in their codes of ethics that the chief compliance officer review the securities reports, or did not specify time frames within which the reports were required to be submitted. In some cases, the code of ethics provided time frames but certain access persons submitted them less frequently than required.

The adviser's Code of Ethics is required to be described in Part 2A of the investment adviser’s Form ADV, and the adviser must state that the Code of Ethics is available to any client or prospective client upon request. Some advisers did not comply with this requirement.

Action Items:

  • Review your firm’s Code of Ethics and make sure that all access persons are complying with it and that your chief compliance officer is reviewing the securities reports. Ensure that your firm is describing its Code of Ethics in its ADV and making it available to clients and prospective clients.

Books and Records

The SEC’s Books and Records Rule[5] requires investment advisers to make and maintain certain books and records relating to their business. The examiners found that some advisers did not maintain all the books and records required to be kept, that their records were inaccurate or outdated, or that their recordkeeping was inconsistent.

Action Items:

  • Your firm’s policies should include clear statements regarding required recordkeeping. The Chief Compliance Officer should periodically check to be sure that all records are being properly created and maintained.


For more information on Securities and Antitrust compliance, please contact Attorney Karen Wackerman at or (203) 330-2278. © 2017 Pullman & Comley, LLC.

1. National Exam Program Risk Alert, February 7, 2017.

2. See, for example, the DOB’s February 2005 release, “Investment Advisory Code of Ethics,”, and its discussion of the “Investment Adviser Examination Program,”

3. Advisers Act Rule 206(4)-2.

4. Advisers Act Rule 204A-1.

5. Advisers Act Rule 204-2.


Jump to Page