SEC to Scrutinize RIAs that Employ High-Risk Advisors
The SEC’s Office of Compliance Inspections and Examinations issued a risk alert on Monday announcing that it will be taking a closer look at registered investment advisers that employ individuals with a history of disciplinary events in the financial services sector, including those who have been disciplined or barred from a broker-dealer.
The OCIE’s supervision initiative will examine the supervision practices and compliance programs at firms that hire “higher-risk” advisors. The agency said that firms should be mindful of their supervisory obligations and may want to consider heightened supervision of those with black marks on their record.
The examinations will focus on the following key risk areas:
Compliance Program: Examiners will review the registered adviser’s practices surrounding its hiring processes, ongoing reporting obligations, employee oversight practices, and complaint handling processes. The SEC says that an important component of the examinations is to evaluate whether the advisers foster robust compliance cultures and “tone at the top.” The agency noted that “tone at the top” is critical to setting the ethical environment of the organization and preventing misconduct.
Disclosures: Examiners will likely review registered advisers’ practices regarding their disclosures of regulatory, disciplinary, or other actions with a focus on assessing the accuracy, adequacy, and effectiveness of such disclosures.
Conflicts of Interest: Examiners will assess the conflicts of interest that a registered adviser or supervised person may have. Particular attention will be given to conflicts that may exist with respect to financial arrangements (e.g. unique products, services, or discounts) initiated by supervised persons with disciplinary events.
Marketing: Examiners will review a registered adviser’s advertisements including pitch-books, website postings, and public statements to identify any conflicts of interests or risks associated with supervised persons with a history of disciplinary events.
The Office of Compliance Inspections and Examinations manages the SEC’s examination program. Entities subject to this oversight include brokers, dealers, municipal securities dealers, self-regulatory organizations, transfer agents, clearing agencies, investment companies, and investment advisers.
