Published on Apr 26th, 2022 |

Brief Introduction

On April 26, 2022, the SEC Division of Examinations (“EXAMS”) noted common deficiencies related to Section 204A and the Code of Ethics Rule (Rule 204A-1 of the Investment Advisers Act of 1940).  The Risk Alert, was titled “Investment Adviser MNPI Compliance Issues.”

As typically seen in the examination of RIAs, these types of violations are low hanging fruit for SEC Examiners and often some of the most common SEC deficiencies identified by EXAMS.

Furthermore, the tone of the Risk Alert, similar to the SEC 2022 Examination Priorities, EXAMS Private Fund Risk Alert, and SEC Proposed Private Fund Rules, further emphasizes a focus on Private Fund Managers; with many risks typically seen in the Private Fund space, which some older, such as Expert Networks and “Value-Added Investors” and some newer such as Alternative Data Providers.

However, all SEC registered investment advisers should take note that EXAMs may infer adviser’s non-compliance of rather low risk items, such as reporting quarterly transaction reports on time, as a red flag for the potential of more serious violations and a deficient compliance program and/or lack of compliance culture. For example, if you can’t submit a simple form on time….are you appropriately managing client assets?

Key Takeaways Of The Risk Alert

For those looking for the highlights of the deficiencies noted related to RIAs’ Policies and Procedures (“P&P”), which were noted as inadequate, see below:

  1. Alternative Data Provider’s P&Ps (e.g., include information from satellite and drone imagery of crop fields and retailers’ parking lots, analyses of aggregate credit card transactions, social media and internet search data, geolocation data from consumers’ mobile phones, and email data obtained from apps and tools that consumers may utilize.)

    • Initial and on-going due diligence.
    • Assessment legal terms or legal obligations related to collection of data.
    • Red flags identification, reporting, and remediation.
  2. Value-Added Investor’s P&Ps (e.g, clients or fund investors that are corporate executives or financial professional investors who may have MNPI)

    • Tailored policies and procedures related to the risk of value-added investors & the potential transfer of MNPI.
    • Maintenance of value-added investors list.
  3. Expert Network P&Ps (e.g., group of professionals who are paid for their specialized info and research services, such as, GLG, Tegus, Coleman, Third-Bridge, Guidepoint, AlphaSights, etc.)

    • Tracking & logging calls.
    • Reviewing notes from calls.
    • Reviewing trading activity in securities of publicly traded securities and similar industries discussed during the calls.
  4. Code of Ethics Policies and Procedures

    1. Access Persons
      • Did not properly define or assign access person status.
      • Did not require or receive pre-approval for personal securities transactions (e.g., IPOs & Private Placements).
    2. Personal Securities Transactions & holding Reports
      • No evidence of review of transaction or holding reports.
      • No independent review of CCO Reporting.
      • Transaction & holding reports not submitted or submitted timely.
    3. Written COE Acknowledgments
      • Code of ethics not provided to supervised persons.
      • No acknowledgment required RIA or provided by Supervised Persons.
      • Holding Reports did not include required securities (e.g., Private Placements).
    4. COE Additional Provision Consideration
      • No requirement of a restricted list and instances of trading on securities on restricted list.
      • “Commission stated that advisers should consider incorporating procedures to ensure that investment opportunities must be first offered to clients”.
        • Instances where Adviser and/or employees received better prices than clients.

Vigilant’s Final Conclusion

Vigilant has significant experience in managing SEC Examinations and has developed best in class policies and procedures that address those items discussed in the EXAMS Risk Alert.

Contact Vigilant today to learn more about how we can provide you high quality cost effective compliance solutions.

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