ocie-priorities

A week into the 2020s OCIE released its priorities for the year ahead. The announcement was intended to provide greater transparency of OCIE’s examination program and highlight what it sees as five key risk areas. In this article, we focus on what fund managers need to know.

2019 results

Of over 3,000 examinations, 2,180 examinations were of registered investment advisers (RIAs), approximately 15% of the registered investment adviser population. Examinations of RIAs ticked down slightly in 2019 (15% of RIAs v 17% of RIAs in 2018), but still represented a marked increase from 2014 where only 10% of RIAs were examined. OCIE noted that the 15% figure was achieved despite the 35-day government shut down at the beginning of 2019.

OCIE further highlighted its intention to “continue to make improvements in efficiency”, but that increased complexity in the industry continues to stretch OCIE’s ability to adequately cover the RIA space. Such comments are in line with what we have seen throughout 2019 where OCIE has increasingly used sweep and correspondence exams in lieu of presence exams.

2020 OCIE priorities for private fund advisers

OCIE priorities will continue to be examinations of dually registered RIAs, RIAs with affiliated broker-dealers and RIAs with supervised persons who are registered representatives of unaffiliated broker dealers. Additionally, OCIE identifies the “core” areas of an RIA compliance program as likely focus areas again in 2020, including:

  • Appropriateness of account selection
  • Portfolio management practices
  • Custody and safekeeping of client assets
  • Best execution
  • Fees and expenses
  • Valuation of client assets for consistency and appropriateness of methodology

Custody and safekeeping of client assets

OCIE expressly states “when RIAs have access to client funds or securities, OCIE prioritizes examination for compliance with the Custody Rule (Rule 206(4)-2 under the Investment Advisers Act of 1940).”

The Office goes on to say examinations of RIA custody includes “important client safeguards like third party audits and surprise examinations.” It’s important for RIAs to understand whether they have custody and the implications and requirements of relying on any exemptions from the custody rule requirements.

Never-before and not recently-examined RIAs

OCIE will continue to conduct “risk-based examinations” of RIAs that have never been examined. OCIE adds that RIAs that have been previously examined but haven’t been examined for several years as part of this group. Five to seven years between examinations is a typical interval, anything longer likely increases the chance of an examination in the near term.

RIAs to private funds

Hot on OCIE’s agenda in the past year has been undisclosed or inadequately disclosed fees and expenses, and the use of affiliated companies to provide services to clients.

In line with previous communications from OCIE and the SEC in general, OCIE intends to focus on RIAs to private funds that have a greater impact on retail investors. The focus remains on areas such as controls to prevent the misuse of non-public information and conflicts of interest.

Standards of care

OCIE states it will continue to assess whether RIAs have fulfilled their duties of care and loyalty. Further, OCIE indicates its intention to assess the implementation of the requirements under Regulation BI, specifically noting an interest in RIAs content and delivery of Form CRS in addition to policies and procedures regarding conflicts of interest. For RIAs, the Interpretation Regarding Standard of Conduct for Investment Advisers will be instructive on a RIA’s compliance with its fiduciary duty.

How Bovill can help

We offer a range of services to keep you ahead of the curve

  • Advisory and guidance on examinations
  • Tailored mock exams, to get you prepared for the real thing
  • Ongoing support to keep you on track, so when exams happen you can feel confident that the firm is ready for an OCIE review

Read more about our Investment Adviser Consulting services.

Share this