The SEC’s Division of Examinations Published Observations From Their Series of Examinations

      November 11th | 2021

      This week, the SEC’s Division of Examinations (the “Division”) published observations from their series of examinations assessing the practices of advisers who provide digital investment advisory services (“digital services”). The Division has seen a recent increase in these digital services, which when used well can provide more accessible services for investments and efficiency for advisers. However, the Division also recognized that there are significant risks to the digital services, such as incorrectly identifying client’s risk and using the services to prioritize the interest of the adviser over the client.

      The Division issued deficiency letters to nearly all advisers whose digital services were examined. The most common deficiencies were:

      Compliance programs that did not:

      • Include written policies specific to their use of the digital services;
      • Undertake at least annual reviews to determine accuracy and implementation of their policies;
      • Comply with their “Code of Ethics” rules;
      • Have accurate oversight policies related to supervision of the platforms, developing accurate investment advice, or seeking best execution;
      • Accurately disclose use of the third-party digital software, collection and use of client information, how they address profits and losses from trade errors, or advisory fee calculations;
      • Include polices regarding protection of the firm’s system or response to cybersecurity events.
      • Advisers operating as unregistered and relying on the digital services registration, which is prohibited under Advisers Act Rule 203A-2(e)(iii).

      Advisers relying on Rule 3a-4, and not accurately following the rule by:

      • Using limited questionnaires that potentially increased the risk of providing advice in the clients best interest;
      • Inaccurately disclosing or responding to the clients ability to designate restrictions on securities bought or held;
      • Not notifying clients frequently enough about the investment objectives or the clients’ financial situation;
      • Limiting clients communication to technical support or general customer service support;
      • Restricted ability to withdraw cash or securities from their accounts;
      • Not letting clients vote proxies, or delegate their right;
      • Not ensuring clients were sent legally required documents;
      • Not allowing clients the legal right to proceed against the issuer of any security in the client’s account.

      To avoid deficiencies in the digital services your firm provides, the Division recommends: adopting and implementing written policies tailored to your firm’s practices; testing algorithms periodically; and employing safeguards to ensure no unauthorized changes to your algorithms occur. If your firm provides digital investment advisory services read the Division’s “Observations from Examinations of Advisers that Provide Electronic Investment Advice.”

      Previous post Next post

      More like this

      The SEC Proposed Amendments to its Electronic Recordkeeping Requirements

      November 23rd | 2021 Last week, the SEC proposed amendments to its electronic recordkeeping requirements for broker dealers, security-based swap…
      Read more

      The SEC’s Division of Examinations Published Their Observations Regarding IA's Fee Calculations

      November 11th | 2021 The SEC’s Division of Examinations (the “Division”) has published their observations regarding Investment Advisers’ Fee Calculations.…
      Read more

      The SEC Has Approved the Public Company Accounting Oversight Board’s Rule 6100

      November 9th | 2021 Last week, the SEC announced that it has approved the Public Company Accounting Oversight Board’s (PCAOB)…
      Read more

      Preliminary Statements for FINRA BD and IA Renewal Feeds are Available for Viewing

      November 9th | 2021 As of yesterday, November 8th, Preliminary Statements for FINRA BD and IA renewal feeds are available…
      Read more

      Examination of Advisers’ Practices for Principal and Cross Trades Involving Fixed Income Securities

      July 26th | 2021 The Division of Examinations (the “Division”) of the Securities and Exchange Commission (“SEC”) conducted extensive examination…
      Read more

      Recent Observations About Common Deficient and Industry Practices Related to Wrap Fee Programs

      July 26th | 2021The Division of Examinations (the “Division”) of the Securities and Exchange Commission (“SEC”) published observations regarding common…
      Read more