Learn how to properly address disciplinary disclosures at your RIA firm.
The SEC has stated in no uncertain terms that it pays extra attention to firms where individuals with disciplinary disclosures work. If you or someone you work with has a disclosure on their record, there are a few important items to keep in mind.
You Must Disclose Them
This might seem obvious when discussing something called “disclosures,” but the SEC regularly audits firms only to find they:
- Omitted material disclosures regarding disciplinary histories of certain supervised persons or the adviser itself.
- Included incomplete, confusing, or misleading information regarding disciplinary events.
- Did not timely update and deliver disclosure documents to clients, such as updating Form ADV for new disciplinary events of supervised persons reported on CRD (e.g., Form U5s).
You Must Address the Risks
If you or someone on your team has disclosures, your policies and procedures need to demonstrate that you understand the risk. The SEC found that many firms had not done so.
From a 2019 SEC risk alert:
Advisers did not have processes reasonably designed to identify:
1) Whether the supervised persons’ self-attestations regarding disciplinary events completely and accurately described those events. For example, some self-attestations contained information that did not fully or clearly describe the disciplinary events.
2) Whether the supervised persons’ self-attestations that they were not the subject of reportable events or recent bankruptcies was in fact the case. For example, some supervised persons reported incorrectly to the adviser that they were not the subject of any reportable events during the reporting period or did not report information regarding recent bankruptcies.
In the same risk alert mentioned above, the SEC's Office of Compliance Inspections and Examinations ("OCIE") provided compliance considerations when hiring employees with a disciplinary history. The listed considerations are:
- Properly designed policies and procedures
- Due diligence practices when hiring
- Heightened supervision practices
- Oversight of remote employees
Review the full risk alert here.