On September 12, 2016, the SEC’s Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert, which announced its intent to conduct examinations of Registered Investment Advisers (RIAs) that employ or contract with persons who have a history of disciplinary events. OCIE’s examinations will evaluate the effectiveness of the RIA’s SEC Investment Adviser Compliance programs, supervisory oversight, and disclosures to clients and prospects.
In publishing the Risk Alert and its supervision initiative, OCIE conveyed the clear message that individuals with a disciplinary history present a risk of future misconduct and pose a threat to investors. By examining the firms that hire them, OCIE’s goal is to ensure that these RIAs will impose heightened supervision of previously disciplined supervised persons. Examiners will make certain that the RIA’s compliance program mitigates the risks the firm faces because it hired one or more individuals with disciplinary events in the background.
OCIE’s Risk Alert defines “employees” and “supervised persons” to include principals and officers of the RIA and other individuals performing services on behalf of the firm, except for clerical employees. It does not matter to examiners if the supervised persons are employees of the RIA or independent contractors.
OCIE’s supervision initiative will focus on the following risk areas at firms that hire individuals with a history of disciplinary events:
The RIA’s Compliance Program. Pursuant to Rule 206(4)-7 under the Investment Advisers Act of 1940, RIAs must adopt and implement written policies and procedures that are reasonably designed to prevent violations of the securities laws. Examiners will review an RIA’s hiring processes, ongoing reporting obligations, employee oversight practices, and complaint handling procedures, to ensure that the firm is building a culture of compliance.
The RIA’s Disclosures. RIAs owe a fiduciary duty to make full and fair disclosure of all material facts. Examiners are likely to review RIAs’ practices related to their disclosures of regulatory or disciplinary infractions. They will scrutinize the accuracy, adequacy, and effectiveness of those disclosures.
The RIA’s Conflicts of Interests. RIAs must fully disclose all material conflicts of interest. Examiners will pay particular attention to conflicts of interest relating to financial arrangements, such as unique products, services, or discounts, initiated by supervised persons with records marred by disciplinary events.
Marketing. RIAs must comply with Rule 206(4)-1 under the Investment Advisers Act, better known as the advertising rule. Examiners will review advertisements, such as pitch books and website content, to identify conflicts of interest or risks connected to supervised persons with a history of disciplinary events.
Even RIAs with robust compliance programs will need to strengthen their policies and procedures if they currently employ or plan to hire Investment Adviser Representatives with a history of disciplinary events. These RIAs should be aware that they are increasing the likelihood that examiners will conduct an examination of their operations in the foreseeable future.
About RIA Compliance Group: RIA Compliance Group is an investment adviser compliance consulting firm based in Boca Raton, Florida. The firm’s mission is to provide affordable, timely, practical, and cost-effective compliance advice. We help investment advisers to comply with the myriad of state and SEC regulations and compliance obligations facing their firms. RIA Compliance Group takes pride in giving personal service and real world compliance advice, not theoretical concepts and legalese. The firm interacts on a daily basis with SEC and state securities regulators.
RIA Compliance Group, LLC – 5301 North Federal Highway, Suite 380, Boca Raton, FL 33487 – Tel: 561-600-0564 – firstname.lastname@example.org.