In 2017, the SEC’s Office of Compliance Inspections and Examination conducted exams of investment advisers that previously employed, or then currently employed, any individual with a history of disciplinary events. According to a just released Risk Alert, this was the Supervision Initiative.
The initiative examined over 50 advisers, with a total of $50 billion in assets and 220,000 clients, most of who were retail investors. The firms were selected based on disclosures of disciplinary events. The Supervision Initiative was announced as part of the 2016 Examination Priorities.
With credit to OCIE, they use the results of these initiatives to guide firms on how to improve their compliance programs. This Risk Alert has five suggestions for firms that have an employee with disciplinary histories.
1. Adopt written policies and procedures that specifically address what must occur prior to hiring supervised persons that have reported disciplinary events. Those procedures should trigger investigations of the disciplinary events and ascertain whether barred individuals were eligible to reapply for their licenses.
2. Enhance due diligence practices when hiring to identify disciplinary events. Conducting background checks on employment histories, disciplinary records, financial background and credit information. Conducting internet and social media searches.
3. Establish heightened supervision practices when overseeing supervised persons with disciplinary histories. The staff found that advisers with written policies and procedures specifically addressing the oversight of supervised persons with disciplinary histories were far more likely to identify misconduct by supervised persons than advisers without these written protocols.
4. Adopt written policies and procedures addressing client complaints related to supervised persons. The staff observed that advisers with written policies and procedures addressing client complaints related to their supervised persons were more likely to have reported the receipt of at least one complaint related to their supervised persons. In addition, these advisers were consistently more likely to escalate matters of concern raised in these complaints than advisers without written protocols.
5. Include oversight of persons operating out of remote offices in compliance and supervisory programs, particularly when supervised persons with disciplinary histories are located in branch or remote offices. Don’t let out of sight mean out of mind.
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