OCIE Issues Risk Alert Highlighting Deficiencies in Compliance, Supervision, and Disclosure of Conflicts of Interest

July 26, 2019 by Jami Jack


On July 23, the U.S. Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (OCIE) issued a Risk Alert detailing compliance issues noted during examinations of advisers who hire or employ individuals with a history of disciplinary events.

OCIE conducted over 50 examinations in 2017 as part of this Supervision Initiative, focusing on compliance programs and supervisory oversight, disclosures, and conflicts of interest. While the examinations were selected because of disciplinary events and other legal actions involving supervised persons of the adviser, the staff reviewed firm-wide supervisory practices in these examinations. Nearly all of the examinations resulted in deficiency letters.

Deficiencies Identified

The Risk Alert details deficiencies related specifically to the oversight of supervised persons with disciplinary histories, including:

  • Failure to provide full and fair disclosure regarding disciplinary events
  • Failure to adopt and implement effective compliance policies and procedures to address the risks associated of hiring individuals with prior disciplinary histories

The Risk Alert also details deficiencies related to advisers’ firm-wide practices and not necessarily attributable to the hiring and employment of supervised persons with disciplinary histories, including:

  • Failure to adequately supervise or set appropriate standards of business conduct for supervised persons
  • Failure to oversee that supervised persons were executing compliance policies and procedures for which they were responsible
  • Adoption of compliance policies and procedures that were inconsistent with the adviser’s actual business practices and disclosures
  • Insufficient annual compliance program reviews that were not adequately documented and did not appropriately assess risk areas applicable to the adviser, or identify certain risks at all
  • Undisclosed compensation arrangements which resulted in conflicts of interest

Recommended Improvements

The Risk Alert outlined the following ways advisers that hire or employ supervised persons with disciplinary histories can improve compliance:

  • Adopt written policies and procedures that specifically address what must occur prior to hiring supervised persons with disciplinary events
  • Enhance due diligence practices associated with hiring supervised persons to identify disciplinary events, including:
    • conducting background checks
    • conducting internet and social media searches
    • fingerprinting personnel
    • utilizing third parties to research potential new hires
    • contacting personal references
    • verifying educational claims
    • requesting potential new hires provide copies of their Form U5s, when applicable
    • reviewing Form U5 filings 30 or more days after are a new hire, when applicable
    • initially checking CRD/IARD and re-checking after a designated period of time, such as three months later
  • Establish heightened supervision and oversight for supervised persons with disciplinary histories
  • Adopt written policies and procedures to address client complaints related to supervised persons

When hiring or employing supervised persons with disciplinary histories, advisers must consider the relevant risks and design and implement robust compliance policies and procedures to address these risks and to make any additional necessary disclosures.

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We provide advisory services and technology solutions that help investments advisers ensure their compliance program meets regulatory obligations. We conduct mock regulatory examinations, policy and procedure reviews, electronic communications reviews, and social media reviews to identify strengths and areas for improvement. We also provide code of ethics support and personal trading technology for managing employee compliance and identifying conflicts of interest. For more information on how we can assist you, please contact us here or connect with your ACA consultant.