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OCIE Issues Risk Alert to Raise Awareness of Issues Arising Out of Examinations of Advisers Employin OCIE Issues Risk Alert to Raise Awareness of Issues Arising Out of Examinations of Advisers Employin

OCIE Issues Risk Alert to Raise Awareness of Issues Arising Out of Examinations of Advisers Employing Supervised Persons with Disciplinary History

In 2017 the Office of Compliance Inspections and Examination (“OCIE”) conducted over 50 examinations of advisers that employed supervised persons with a disciplinary history. These examinations, referred to by the Staff as its “Supervision Initiative”, were designed to assess the oversight practices of these SEC-registered advisers over this category of supervised persons. These advisers collectively managed approximately $50 billion in assets for nearly 220,000, primarily, retail clients.

Click here to read the OCIE's alert.
These examinations largely focused on the following areas, particularly as they relate to the supervision of employees having a disciplinary history:
  • Compliance Programs and supervisory oversight
  • Disclosures
  • Conflicts of Interest
Deficiency letters were issued to nearly all of the examined advisers, but on a macro-level the Staff made the following observations:
  • Advisers failed to make full and fair disclosures regarding disciplinary events;
  • Advisers failed to adopt and implement compliance programs designed to address the risks associated with hiring and employing individuals with prior disciplinary histories;
  • Advisers failed to update disclosure documents reflecting disciplinary events;
  • Advisers failed to adequately supervise or set appropriate standards of business conduct for their supervised persons;
  • Advisers failed to sufficiently document the responsibilities of supervised persons or did not clearly outline the expectations of these individuals;
  • Advisers failed to confirm that individuals assigned supervision responsibilities were actually executing those duties;
  • Advisers had business practices that were inconsistent with their adopted policies and procedures; and
  • Advisers failed to adequately conduct and document annual compliance reviews.
The Staff proposed the following ways to improve compliance:
  • Adopting written policies and procedures that specifically address what must occur prior to hiring supervised persons that reported to the adviser disciplinary events;
  • Enhancing due diligence practices associated with hiring supervised persons to identify disciplinary events;
  • Establishing heightened supervision practices when overseeing supervised persons with certain disciplinary histories;
  • Adopting written policies and procedures addressing client complaints related to supervised persons; and
  • Including oversight of persons operating out of remote offices in compliance with supervisory programs.
The practical take away from this Risk Alert is that the Staff is focused on an adviser’s obligation to supervise its employees. Advisers employing individuals with disciplinary events in their work history assume greater regulatory risk and should expect to attract greater attention from OCIE. Those advisers should take enhanced steps to make sure their compliance programs, policies and procedures are designed and implemented to reflect those additional risks.

If you have additional questions, please contact Matt Fornshell or another member of the Securities Litigation and Regulation Group.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
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