OCIE Risk Alert Urges Advisers to be Alert to Risks of Supervised Persons when Designing Compliance and Supervision Frameworks

Published On September 5, 2019

5 September 2019: The US Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examination (OCIE) has published a risk report assessing the practices and processes employed by SEC-registered investment advisers regarding employees with a history of disciplinary events. 

The report, published in late July, is driven by the cumulative findings of 50 examinations of advisers in 2017. It focussed on adviser practices in areas including: conflicts of interest, especially whether conflicts of interest were properly disclosed; whether advisers had suitably designed their policies and procedures to detect and prevent violations of the Advisers Act; and the disclosure of documents and whether their contents were full, fair and not misleading.

The examinations uncovered a series of failings across various topics, with nearly all examined advisers receiving deficiency letters. In particular, the examinations found failings in the following key areas:

  • Full and fair disclosure. Almost half of deficiencies in this area were the result of firms providing inadequate information regarding disciplinary events. OCIE found an over-reliance on self-reporting meant that disclosures regarding disciplinary actions had often been omitted. Further, advisers had been ambiguous in their reporting and in some instances had provided incomplete, misleading and confusing information about disciplinary actions. Most firms had failed to deliver timely updates and disclosure documents to their clients.
  • Effective compliance programs. OCIE found that the majority of firms had failed to successfully adopt and implement compliance policies and procedures, specifically those concerning the risks associated with hiring individuals with a history of disciplinary action. Firms did not have sufficient processes in place to check whether individuals’ accounts of their own disciplinary records were complete and accurate, nor did they have processes to check whether employees had been truthful in instances where they said they had not been subject to reportable events.
  • Supervision. OCIE’s staff reported that, in a number of instances, supervised persons were not adequately supervised and expected standards of business conduct had not been set. In some cases, the activities of supervised persons were not sufficiently monitored, which meant that they had been given free rein to operate in a self-directed manner that was inconsistent with the advisers’ policies and procedures.
  • Oversight. Advisers failed to ensure that supervised persons were executing their duties as prescribed. Some individuals had been allocated particular roles and responsibilities, but advisers had failed to implement a system that made sure the duties were being performed accordingly.

In light of the findings, OCIE recommends that advisers that hire or employ supervised persons with disciplinary histories take steps to ensure these failings don’t arise. Suggestions include the creation of specific and clear policies and procedures, the enhancement of due diligence practices, establishing heightened supervision practices and  adopting written policies and procedures to address client complaints related to supervised persons.

Ultimately, OCIE encourages advisers, when designing and implementing their compliance and supervision frameworks, to consider the risks presented by hiring and employing supervised persons with disciplinary histories, and to adopt policies and procedures to address those risks. In response to these observations, OCIE reports that some advisers have since amended their disclosures and reviewed their compliance policies.