Wednesday, July 2, 2014

South Carolina - Compliance Program MUST be customized!

The South Carolina Securities Division made it very clear to advisors in its July 2, 2014 email (below). As you may be aware, you compliance program must be customized to reflect your business model and activities. It must be customized. Please see the attached notice.

Note: While other states have not yet required submission of these documents, they do expect the same level of customization.

From: SC Securities Division
Subject: Policies and Procedures Manual Review-Action Required
Date: July 2, 2014 at 4:21:03 PM EDT

When the South Carolina Securities Division is examining investment advisers, we frequently find weaknesses in adviser compliance and supervisory programs as documented in their policies and procedures manual. As a state-registered investment adviser, you are required to maintain written policies and procedures that are reasonably designed to prevent violations of the South Carolina Uniform Securities Act from occurring, detect violations that have occurred, and promptly correct such violations.

Given the weaknesses we have seen in the manuals that we have reviewed as part of our examination process, we are requiring that all state-registered investment advisers review their policies and procedures manual at this point in time to ensure that it is complete and up-to-date, and provide an electronic copy via return email to this address by Monday August 4. We will review the responses at a high level to get a better understanding of your firm’s operations as we schedule our on-site examinations, and a more detailed review will be conducted and comments regarding deficiencies will be provided when we conduct our on-site examinations.

Common deficiencies we have encountered include manuals that are out of date, are too generic and have not been tailored to the advisor’s business, include references to regulations other than the South Carolina Uniform Securities Act, or are incomplete. In other cases, we have seen very good manuals, but no evidence of any ongoing review of the manual or completion of any of the forms required by the manual.

Policies and procedures manuals are not required to contain specific elements. Rather, advisers should analyze their operations and identify conflicts and other factors that create risks, then design policies and procedures that address those risks. The Securities Division expects that adviser policies and procedures, at a minimum, address the following issues to the extent that they are relevant to your business:

  • Portfolio management processes, including allocation of investment opportunities among clients and consistency of portfolios with clients’ investment objectives, your disclosures to clients, and applicable regulatory restrictions;
  • Trading practices, including procedures by which you satisfy your best execution obligation, use of client brokerage to obtain research and other services (“soft dollar arrangements”), allocation of aggregated trades among clients, and correction of trading errors;
  • Procedures to ensure client suitability information is gathered and maintained in writing throughout the time during which the adviser works with the client;
  • The accuracy and timeliness of disclosures to clients and regulators, including account statements, advertisements, and the Form ADV Parts 1 and 2;
  • The accurate creation of required books and records and their maintenance in a manner that secures them from unauthorized alteration or use and protects them from untimely destruction;
  • Proprietary trading by you and the personal trading activities of your supervised persons;
  • Supervisory procedures, including review and written approval of new accounts, transactions, correspondence and handling of client complaints;
  • Processes to value client holdings and assess fees based on those valuations;
  • Portfolio performance reporting and performance advertising including methods of calculation, use of results, appropriate comparisons, and disclosure of limitations on information, methodology and relevance;
  • Proxy voting
  • Insider trading;
  • Safeguarding of client assets from conversion or inappropriate use by your personnel;
  • Safeguards for the privacy protection of client records and information;
  • Marketing advisory services, including the use of solicitors; and
  • Business continuity plans.

This manual should be a living, breathing document that is continually updated to reflect changes in the adviser’s business, rules, regulations and personnel, including documentation of a comprehensive review at least annually. The comprehensive review should be conducted by the appropriately designated person or persons, and a record created to evidence that the review has been conducted. Outdated versions should be maintained for at least the five year retention period required for the adviser’s books and records.

The adviser should provide its investment adviser representatives and employees with ongoing training of its compliance procedures, including notifying investment adviser representatives and employees when revisions are made.

We are frequently asked whether an investment advisory firm with only one investment adviser representative is required to maintain written policies and procedures, and the answer is yes. Your firm is required to maintain such policies and procedures regardless of the number of employees associated with the firm. However, since these policies and procedures need to be written to cover the compliance considerations relevant to the operations of the firm, it would be expected that smaller firms with simpler business models and few conflicting business interests would have simpler policies and procedures than a larger firm with a more complex business model or multiple conflicts of interest.

We are also asked about purchasing an “off –the-shelf” policies and procedures manual. While such a manual may be a good starting point, it must be thoroughly reviewed and revised to reflect the actual operations of your firm. Purchased manuals may be designed more for federal-registered investment advisers and reference the Investment Advisers Act of 1940, versus the South Carolina Uniform Securities Act, as required for South Carolina state-registered firms.

Absent extenuating circumstances, which must be communicated in writing to the Securities Division, investment advisers who fail to provide their policies and procedures manual by August 4 can expect to be referred for administrative action, which may include suspension or revocation of your license and fines.

Thank you for your assistance. If you have any questions, please contact Lisa Lomas or Pam Kirkland at (803) 734-9916.

South Carolina Securities Division

If you have any questions regarding your state or SEC compliance program, please contact AdvisorAssist at


Post a Comment