SEC eyes advisory firms with ‘high-risk individuals'

October 4, 2016

In September, the Securities and Exchange Commission issued new guidance outlining areas of risk alerts and addressing SEC-registered investment advisors that employ individuals with disciplinary histories, including those who have been disciplined or barred from a broker-dealer. The initiative is part of the SEC's Office of Compliance, Inspections and Examinations 2016 priority to focus on recidivists and their employers. 


Examinations will assess whether registered advisory firms have implemented policies and procedures specific to the risks presented by employees with disciplinary history, focusing on the compliance cultures and tone at the top of the examined advisors. Such individuals may present an increased risk of future misconduct, and thus can present harm to clients, according to the SEC.


These examinations will assess such advisors' business and compliance practices, particularly those practices related to the firms' supervision of higher-risk individuals.  The OCIE staff will be responsible for conducting the examinations of registered investment advisors that employ or contract with supervised persons who have a history of disciplinary events. These examinations will focus on evaluating the effectiveness of advisors' compliance programs, supervisory oversight practices and disclosures to clients and prospective clients, particularly relating to the potential risk associated with financial arrangements initiated by supervised persons with a disciplinary history. 


The SEC said that advisory firms that employ or hire supervised persons with disciplinary events should be mindful of their supervisory obligations and may want to consider heightened supervision of such individuals. This includes disciplinary events that occurred during the individual's employment with the advisor and prior employment. 


OCIE's Supervision Initiative will focus on registered advisors' compliance programs and particularly on the supervision of supervised persons that may pose increased risks to advisory clients.


First reposted by Laetitia Mantel (Milne Legal) on 4th October.


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