Sponsored by Orion
By Kylee Beach
According to the 2019 Exam Priorities as outlined by the SEC’s Office of Compliance Inspections and Examinations (OCIE), audits of advisors are on the rise – and the trend shows no signs of slowing down.
In fiscal year 2018, OCIE examinations of SEC-registered investment advisers increased to 17 percent of all registered advisers, a bump up from 15 percent in 2017. Examinations are increasing even as the number of advisors is increasing and the money they’re managing increased to total $84 trillion.¹
Additionally, OCIE is using technology and data analytics to assist with identifying which firms to examine, and how often.
In this world of enhanced scrutiny, many advisors are asking: “What should I do to protect my firm and my clients?”
Claiming ignorance on your firm’s processes is not a defense an SEC examiner wants to hear. When it comes to a potential audit, it’s essential for firms to have a solid grip of not only what their compliance manual says, but how they can demonstrate compliance.
Keeping Track of the Unknown
One area of focus for SEC examiners relates to the firm’s Code of Ethics and how the firm monitors compliance by employees. This includes oversight of the activity within employees’ personal trading accounts.
According to Rule 204A-1 (better known as the “Code of Ethics” rule), every advisory firm must establish, implement, and enforce a written code of ethics for its employees. A key part of every firm’s Code of Ethics is the requirement that all employees submit transaction and holdings reports to the firm, so that compliance officers can compare employee trade activity to that of the firm. Given a firm’s fiduciary responsibility to its clients, it’s critical that employees are acting in ways that avoid conflicts of interest to their client accounts or otherwise put their interests ahead of a client’s.
Some of the chief concerns that Rule 204A-1 addresses are front-running trades based on insider information as well as the purchase of restricted securities. The trouble is, a firm’s good standing and ability to avoid these scenarios most often rests on employees adhering to pre-clearance policies.
But relying on employees to self-report is never an exact science. Firms who base their daily processes on manual processes are more likely to put themselves into harm’s way than to protect their clients.
Gain Insight with the Right Technology
In years past, advisory firms could claim that tracking employee conduct in real time was a difficult task. While software systems were put in place to pre-approve trades and track accounts, the inability to automate processes also meant that many firms did not or could not adopt the stringent type of reporting necessary.
Today, technology makes it simple for advisors to access employee accounts and confirm that they’re operating by the book in every instance.
Advisors who don’t leverage their technology to perform frontrunning reviews put their firm’s future at risk. By integrating their trading tools with their portfolio accounting technology, advisors can keep their review simple and centralized.
When it comes to compliance, knowing what you don’t know is less than half the battle. It is the responsibility of each firm to identify the unknown, and then take action by using technology to secure its future.
Want to learn more? Contact Orion at [email protected] or 402-496-3513.
Kylee Beach serves as General Counsel for Orion where she oversees various legal matters affecting Orion and its affiliated companies, including contracts, intellectual property, and other corporate matters.
1 2019 Examination Priorities. U.S. Securities and Exchange Commission, Office of Compliance Inspections and Examinations. www.sec.gov/files/OCIE%202019%20Priorities.pdf
Learn more at www.orionadvisor.com.
