Securities Regulation Daily OCIE announces that examinations will focus on supervision of those with disciplinary histories
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Monday, September 12, 2016

OCIE announces that examinations will focus on supervision of those with disciplinary histories

By Jacquelyn Lumb

The SEC’s Office of Compliance Inspections and Examinations has issued a risk alert to let registered investment advisers know of its intent to focus on their supervisory practices as they relate to the employment of individuals with disciplinary histories. Given that these individuals may pose an increased risk of future misconduct that may harm clients, OCIE’s examinations will focus on the effectiveness of advisers’ compliance programs, their supervisory oversight practices, and their disclosures about the potential risks associated with financial arrangements initiated by individuals with a disciplinary history.

The risk alert puts advisers on notice that when they hire individuals with disciplinary histories, they may want to consider heightened supervision of these individuals. During its examinations, OCIE will assess whether advisers have implemented policies and procedures that target the specific risks posed by employees with disciplinary histories. The staff will also consider the compliance culture and tone at the top of the advisory firm that is being examined.

Targeted advisers. OCIE will use a number of its analytical capabilities to identify the advisers that will be examined under this initiative. The sources will include SEC databases and filings as well as external sources. For example, according to the risk alert, the staff will consider disciplinary information that is reported on the adviser’s Form ADV; information about other legal actions, including private civil actions that are not required to be reported on Form ADV; and SEC enforcement actions in which individuals were barred or suspended from certain financial industries.

Key risk areas. The staff alert identifies as one of the key risk areas the adviser’s compliance program, which must be reasonably designed to prevent violations of the Investment Advisers Act. This area includes its hiring practices, ongoing reporting obligations, oversight practices, and complaint handling processes.

Another key risk area relates to the provision of full and fair disclosure. Advisers must update their Form ADV Part 1 and brochures at least annually, and more frequently if necessary to report material changes. Examiners will assess advisers’ practices with respect to their disclosures about regulatory, disciplinary, or other actions to ensure accuracy, adequacy, and the effectiveness of the disclosure.

Examiners also will assess any conflicts of interest, particularly those that relate to financial arrangements initiated by supervised persons with disciplinary histories, and will review marketing materials and advertisements.

By issuing the risk alert, OCIE said it hopes to encourage advisers to consider their risks, policies, practices, and procedures and address any areas where improvements might be needed.

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