The Office of Compliance Inspections and Examinations (“OCIE”) conducts a series of examinations assessing SEC RIAs business practices, with the purpose in protecting retail investors. The OCIE has recently examined over 50 RIAs revealing a variety of deficiencies. The intent of the review was to assess the oversight practices of RIAs that previously employed or currently employ any individual with a history of disciplinary events, violating the Advisers Act. Inconsistent compliance policies and procedures and inadequate supervision have enabled RIAs to act beyond their business practices.


The OCIE focused their examinations around the following areas:

  • Compliance Programs
    • Whether the policies and procedures were reasonably designed to detect and prevent rule violations
  • Supervisory Oversight Practices
    • Whether the policies and procedures covered the business activities of supervised persons, especially previously-disciplined individuals
  • Disclosures
    • Whether disclosures in public statements were full and fair, included all material facts, and not misleading
  • Conflicts of Interest
    • Whether the adviser identifies, addresses, and fully and fairly discloses all material conflicts of interest, specifically compensation agreement relationships

After conducting the exam, Firms were observed to have provided insufficient information regarding disciplinary actions by omitting material disclosures of certain supervised persons or the advisor itself. The Firms failed to update disclosure documents and provide information of disciplinary events to their clients. Disciplinary disclosures were observed to be misleading and incomplete as the allegations, date of the event, sanctions, and number of events were not disclosed.

The OCIE also observed significant weaknesses in compensation agreements, allowing conflicts of interest.  Advisors and or supervisory persons have failed to disclose in forgivable loans, the terms of which were contingent upon client-based incentives, influencing the investment decision resulting in higher expenses and fees for clients.

In many instances, it was observed that firms did not sufficiently supervise advisers as they were found to  not document the responsibilities of supervised persons or outline business activity expectations. The RIAs then engaged in violating FINRA rules and regulations by preparing misleading advertising and marketing materials, charging undisclosed fees, and operating in a self-directed manner.

Asgard’s Take

The SEC staff observed that many advisers failed to implement adequate policies and procedures consistent with the nature of their business. Developing procedures and supervision frameworks pursuant to SEC rules, provide employees with concise guidelines for their business practices. Enforcing employees to comply with these policies and procedures prohibit and attempt to prevent risk associated and unethical business practices. It is recommended that RIA Firms test their policies and procedures for adequacy of supervisory, compliance, and risk management. Asgard would suggest implementing the following in their written policies and procedures for these firms:

  • Due Diligence on Hiring Individuals with Disciplinary Events, New Hire Documentation, and Document Disclosure Review
  • Enhanced Due Diligence on identifying misconduct and disciplinary events for all employees
  • Establishing supervision practices
  • Procedures addressing client complaints
  • Instituting employee business lines and responsibilities
  • Addressing compliance with Advisers Act and Advertising Rule

Click here to read the SEC Risk Alert in its entirety.

Please contact an ARG Analyst with any questions regarding the matters discussed.