OCIE Examines Investment Adviser Oversight of Supervised Persons with Disciplinary History

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The SEC Office of Compliance, Inspections and Examinations (OCIE) issued a Risk Alert to address compliance and disclosure issues raised in examinations covering the oversight practices of SEC-registered investment advisers “that previously employed, or currently employ, any individual with a history of disciplinary events.” The Risk Alert is part of OCIE’s “Supervision Initiative,” consisting of over fifty examinations of advisers, who collectively manage $50 billion in assets for approximately 220,000 clients.

During the examinations, which occurred in 2017, OCIE found deficiencies related to disclosures, compliance and supervisory practices, as well as conflicts of interest. OCIE found that almost half of the disclosure-related deficiencies were due to advisers providing inadequate information regarding disciplinary events, including, (i) omitting material disclosures regarding disciplinary histories, (ii) providing incomplete, confusing, or misleading information concerning  disciplinary events, (iii) not providing timely updates and delivery of disclosure documents to clients, such as form ADV reported on CRD, and (iv) inaccuracies in supervised persons’ self-attestations.  

During their examinations, OCIE found common compliance and supervisory deficiencies, including failures to (i) set appropriate standards of business conduct for their supervised persons; (ii) determine whether fees charged by supervised persons were disclosed or whether the services were performed; (iii) oversee supervised person’s compliance with advertising rules; and (iv) monitor activities of supervised persons, particularly those who work from remote locations.

The examinations also exposed failures to ensure that supervised persons were executing their compliance responsibilities, failures to monitor the appropriateness of client account types, failures to maintain accurate books and records, inconsistent policies and procedures and insufficiencies in advisers’ annual reviews.

Finally, OCIE reported finding conflict of interest issues related to undisclosed compensation arrangements, including forgivable loans that were made to advisers contingent upon certain client-based incentives.

Improving Compliance:

OCIE proposed a number of ways that firms could address the weaknesses in their compliance frameworks related to supervised individuals with a prior history of disciplinary events. These include (i) adopting specific policies and procedures and enhancing due diligence practices prior to hiring supervised  persons; (ii) enhancing due diligence through written policies and background checks, (iii) establishing heightened supervision practices, including written policies and procedures, when overseeing supervised persons with certain disciplinary histories and over persons operating out of remote offices, and (iv) adopting policies and procedures addressing client complaints related to supervised persons.

Compliance Takeaways: What Should Your Firm Be Doing Now?

1. Firms should review policies and procedures to ensure they contain clear guidance on the hiring/onboarding of persons with a disciplinary history.
2. Firms should implement background checks into the onboarding process, as well as assess heightened supervision program standards for supervised persons with background histories necessitating heightened supervision.
3. Compliance departments should review practices and develop a risk-based approach to reviewing remote locations.

How Bates Group Helps You:

Bates Group brings tailored compliance consulting solutions to financial services clients. Our compliance team includes senior compliance staff and former regulators, who test policies, procedures, supervisory and compliance processes, recommending changes and best practices to enhance compliance and supervisory systems, and to remediate the results of regulatory and litigation findings.

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For more on Bates Group’s Compliance Consulting, please give us a call at (503) 670-7772 or contact: 

Robert Lavigne, Managing Director, Compliance

Email: rlavigne@batesgroup.com   Phone: 508-868-6741

Rory O'Connor, Director, Business Development

Email: roconnor@batesgroup.com   Phone: 860-671-7270

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