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News October 9, 2006 Issue

Top OCIE Deficiencies … and Some Food for Thought

In case you haven’t noticed, the top five deficiencies found in investment adviser exams really don’t vary from year to year. While the order "might change a little bit," said OCIE chief counsel John Walsh, speaking at the recent IA Week compliance conference, "the reality is, year in and year out they are all pretty much the same."

With that in mind, here are Walsh’s current top five investment adviser exam deficiencies:

  • Books and records. "We are always finding a lot of books and records deficiencies," said Walsh. "That’s very straightforward."
  • Portfolio management. "This is really where the adviser’s services interact with the client’s desires, so obviously this is an issue we are going to look at very carefully," he said.
  • Personal trading. This, noted Walsh, involves an inherent conflict of interest: "You’re giving advice to your clients and you’re taking some of it yourself." He also noted that personal trading compliance covers a range of approaches, from "highly ministerial" tasks such as obtaining reports on time and making sure certain data fields are filled in, all the way to "higher level" issues such as identifying the fundamental nature of the conflict.
  • Advertising. "In our advertising-saturated society, it would be very unusual if we did not have a lot of advertising-type issues coming out of our exams," Walsh noted.
  • Brokerage arrangements. "It is not surprising that we are going to look at them carefully and that year in, year out we would generally find a lot of conflicts in them," he said.

Walsh also noted several topical areas that CCOs might want to think about. "I would put [these] in the category of ‘food for thought’ as you go back to your shop," he said.

  • Seniors. Senior citizens, said Walsh, have a "special status" in terms of compliance and suitability. "[T]his is an area that I think you really need to be focusing on," he said. "We’ve been giving this a lot of attention over in the brokerage community, but I think here in the advisory community you should be thinking about this as well." Walsh noted that the population of baby boomers is aging, concluding that the issue of seniors "is going to be a growing rather than shrinking" one. "If you are located in an area of the country that has a high concentration of retirees," Walsh added, senior-related issues may be "much more of a focus [by examiners] than would be in some other part of the country."
  • Operational issues. Walsh noted that a number of SEC enforcement cases against advisers over the last year have involved operational issues. He pointed to cases involving transferring of funds, interpositioning a transfer agent between a transfer agent and the fund, and "messing up" on the redemption fee implementation. The cases involve "a lot of very nuts and bolts operational-type issues," he said. "Hopefully you are paying attention to them."
  • Identity theft. Walsh noted that OCIE is currently conducting an identity theft examination sweep, involving both brokers and advisers. "You should be asking yourself what are we doing to protect our clients from identity theft," he said.
  • Advertising in new channels. Walsh said that examiners have been looking at RFPs "very carefully," noting that there has been some enforcement activity in that area.
  • Disclosure of one’s examination experience. "We’re not saying you have to say anything about it," said Walsh. However, firms that do report their exam results to consultants or otherwise discuss it in their advertising materials should make sure their description is correct. "Please make sure you are accurate," said Walsh. "There are a lot of things we don’t know about, but there’s one thing we will know about and that’s what we told you in our last deficiency letter."