The SEC Examinations Division recently released a Risk alert with observations on investment advisers’ compliance programs, noting the many gaps and weaknesses he encountered. On the same day the risk alert was issued, Peter Driscoll, director of the Office of Inspections and Compliance Reviews, now the Examinations Division, delivered remarks to 10^e National Compliance Awareness Program Seminar on (1) how, despite the Covid-19 pandemic, the Examinations Division was able to continue its examination efforts, and (2) the Examination Division’s relentless pursuit to ensure that Chief Compliance Officers (CCO) are effective by focusing on the authorization, seniority and authority of the CCO. Overall, the timetable and the unequivocal public statements are a strong warning to investment advisers to strengthen compliance programs and hold staff accountable by 2021.

1. The impact of the pandemic on the examinations division

The pandemic has limited the ability of the Examinations Division to examine advisers or interact with them in person. The Examinations Division, however, managed to conduct over 2,950 exams in FY2020, including 15% of all SEC-registered investment advisers, and increased its remote exam capacity.

After reaching out to investment advisers and investment firms to assess the impacts of COVID-19, the Reviews Division found that the majority of companies have business continuity plans (BCPs). Many BCPs included areas critical to operations, such as working remotely, succession plans in the event of death and incapacity of key personnel, and contingency plans when other essential personnel are unable to. work for long periods. A small percentage of companies even had pandemic-specific plans in place before the COVID-19 pandemic.

The director explained how businesses continue to develop new ways of dealing with COVID-19, but that new challenges may arise from solutions. Notably, the Director noted that (1) “the burden on companies to adapt to processes such as remote due diligence of service providers and sub-advisers will require considerable attention from [(2)] new technology adopted to meet business or compliance needs during the pandemic may pose risks that will need to be assessed by knowledgeable and knowledgeable compliance departments. “

2. Empowerment, seniority and authority of the CCO

In his statement, the Director emphasized the theme of “empowerment, seniority and authority” to ensure that CCOs are effective in their businesses. He also noted that “the effectiveness of the CCO and that of a company’s compliance program are critical to investor protection.” He also cautioned companies against taking a ‘tick the box’ approach to the CCO requirement, where they see it simply as a way to meet the rule. Instead, Driscoll noted, companies should view the role as an essential part of running a consulting or fund business. The SEC has often spoken of a culture of compliance. This approach to thinking about the role of the CCO follows the same idea.

The Examinations Division expects businesses to have adequate resources to support compliance staff, including adequate training and sufficient staff to support business growth. Empowerment, however, is at least equal to training and resources, according to Driscoll. In other words, the Examinations Division believes that a firm’s compliance service must be fully integrated with the adviser’s activity in order for it to be effective and have management support.

Additionally, on the same day as Driscoll’s speech, the Examinations Division issued a risk alert noting shortcomings it said were common in recent exams. Topics covered include: (A) inadequate compliance resources, (B) insufficient CCO authority, (C) deficiencies in the annual review, (D) implementation of actions required by written policies and procedures , (E) maintaining accurate and complete information in policies and procedures and (F) maintaining or establishing reasonably designed written policies and procedures.

Take away food

• Companies need to determine whether their BCPs adequately and specifically address pandemic preparedness and extended work-from-home policies.
• The clearance, seniority and authority of the CCO will likely be a focal point during SEC reviews and, therefore, investment advisers should consider any changes they may need to make in order to adequately respond to the situation. these requests.
• Advisors should also review and modify their policies and procedures as necessary to ensure that they are appropriate for the advisor’s business and applied.