RIA Compliance and Practice Management Blog

SEC will Audit RIA Firms that Employ Staff with Disciplinary Events

Posted by RIA in a Box

Sep 12, 2016 3:08:26 PM

SEC Exam of RIA Supervision of Employees with Past Disciplinary EventsToday, the Securities and Exchange Commission (SEC) Office of Compliance Inspections and Examinations (OCIE) staff issued a new registered investment adviser (RIA) regulatory risk alert related to the examination of compliance supervision practices at investment advisory firms that "have employed or employ individuals with a history of disciplinary events, including individuals that have been disciplined or barred from a broker-dealer." This announcement comes after the SEC earlier this year listed this initiative as a 2016 investment adviser examination priority

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It's clear for some time now that the SEC examination staff has been focused on identifying RIA firms that hire staff members with past disciplinary issues to ensure that proper supervision practices are implemented. However, today's National Exam Program Risk Alert provides additional guidance as to what particular risk areas SEC staff will be focused on during examinations.

As RIA compliance consultants, we also want to remind investment adviser firm principals that they should exercise great caution and diligence before deciding to hire an individual with past disciplinary history, whether such history is required to be disclosed by the firm or not. If a firm principal decides to still bring on such an individual, the SEC notes in latest alert that it will assess such "advisers' business and compliance practices, particularly those practices related to the firms' supervision of higher risk individuals." Furthermore, SEC OCIE staff note that they will also "focus on the compliance cultures and tone at the top of the examined advisers." It's also important to highlight that regardless if a staff member is an independent contractor of employee of the firm, the same supervision requirements still apply.  

To identify RIA firms to audit, the SEC will review internal and external resources including Form ADVs, private civil actions, and past SEC enforcement actions. The exams will focus on these four key risk areas:

  • Compliance Program: The staff notes that there will be a focus not only on the implementation of "written policies and procedures reasonably designed to prevent violations of the Advisers Act," but also on the compliance culture set by firm leadership as the "tone at the top is critical to setting the ethical environment of the organization and preventing misconduct."
  • Disclosures: In particular, there will be a focus on the "disclosures of regulatory, disciplinary, or other actions with a focus on assessing the accuracy, adequacy, and effectiveness of such disclosures."
  • Conflicts of Interest: In regards to conflicts, there will be a focus on "financial arrangements (e.g. unique products, services, or discounts) initiated by supervised persons with disciplinary events."
  • Marketing: Examiners will review "pitch-books, website postings, and public statements to identify any conflicts of interest or risks associated with supervised persons with a history of disciplinary events."

We recommend that all RIA firm principals review this latest risk alert in detail as there are a number of observations that are relevant to the supervision practices of all investment advisory firms.

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Topics: RIA Operations, RIA Compliance

RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

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