In this month’s article, Lexington Compliance discusses the latest SEC guidance pertaining to RIA branch office supervision.
The Securities and Exchange Commission (SEC) recently hosted a live webcast on June 13, 2017, as part of its compliance outreach program for investment companies and investment advisor senior officers. The event was hosted by the Chicago regional office and covered a variety of topics. One topic that received attention is the SEC's growing focus on registered investment advisor (RIA) firms that operate across the country with a large number of branch offices. During the webcast and at other recent industry compliance events, SEC staff members have noted they are now observing many of the same characteristics of the broker-dealer branch office model being replicated in the investment advisor world. While the SEC has always been focused on branch office supervision, the changing industry landscape is leading to an increased investment advisor regulatory focus.
Recent SEC Public Releases
In addition to recent SEC staff commentary, two recent SEC public releases indicate an increasing RIA branch office supervision focus:
- On December 12, 2016, the SEC Office of Compliance Inspections and Examinations (OCIE) staff issued a new registered investment adviser (RIA) regulatory risk alert announcing an initiative to audit RIA firms that operate from multiple office locations. The risk alert notes that "OCIE staff has observed an apparent increase in the use of investment advisors employing a business model with numerous branch offices and operations geographically dispersed from the advisor’s principal or main office. The use of a branch office model can pose unique risks and challenges to advisors, particularly in the design and implementation of a compliance program and the supervision of people and processes in branch offices."
- On January 12, 2017, the SEC released its annual top exam priorities for the 2017 calendar year. As was the case in the 2015 and 2016 exam priority releases, the SEC once again listed "multi-branch advisers" as a regulatory focus area for the upcoming year. In particular, the staff states it is focused on the "design and implementation of a compliance program and the oversight of advisory services provided at branch offices."
Form ADV Changes Effective October 1, 2017
Furthermore, as part of the SEC's new Form ADV filing requirements taking effect on October 1, 2017,* RIA firms with multiple branch offices will now need to disclose additional information regarding the firm's 25 largest offices. In particular, the SEC is updating Item 1.F. of the Form ADV and Section 1.F. of Schedule D to require RIA firms to disclose total number of branch offices and "provide information in Schedule D about their 25 largest offices in terms of number of employees.” Previously, an RIA firm had to only provide limited additional information about its five largest branch offices.
In addition, the SEC is amending Section 1.F. of Schedule D "to require advisers to report each office’s CRD branch number (if applicable) and the number of employees who perform advisory functions from each office, identify from a list of securities-related activities the business activities conducted from each office, and describe any other investment-related business conducted from each office" as part of the annual updating amendment.
RIA Compliance Supervision Best Practices
As the SEC highlights, more investment advisory firms continue to implement a business model with multiple branch office locations. Some of these RIA firms are started on day one with the goal to recruit advisors and open offices across the country while others have established a number of office locations over time through a series of acquisitions. There is no prohibition or limitation on the number of branch offices that an advisory firm may have. However, many RIA firms operating under such a model have not established the proper supervisory policies, procedures, and monitoring systems to ensure that staff members at branch offices are conducting business in a compliant manner.
As RIA compliance consultants, we want to remind all investment advisory firm principals to constantly review and modify compliance policies and procedures to ensure they sufficiently address and mitigate the current risk areas of the firm. Before a firm establishes its first branch office, a number of new policies and procedures need to be implemented to ensure proper supervision. It's also important to note that independent contractors operating as individual investment adviser representatives of a firm should be treated no differently as it relates to supervision. Both employees and independent contractors are required to be supervised.
RIA firms also need ensure that all filing information is kept up to date and that all relevant branch office information is fully disclosed with the upcoming Form ADV changes. Firms that operate with a multi-branch office model may also want to implement the proper RIA compliance software platform to assist with supervision requirements. We also recommend that all RIA firm principals review this latest SEC public release in detail as there are a number of observations that are relevant to the supervision practices* of investment advisory firms of all sizes.
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