Tag: Supervision Initiative

The Supervision Initiative

In 2017, the SEC’s Office of Compliance Inspections and Examination conducted exams of investment advisers that previously employed, or then currently employed, any individual with a history of disciplinary events. According to a just released Risk Alert, this was the Supervision Initiative.

The initiative examined over 50 advisers, with a total of $50 billion in assets and 220,000 clients, most of who were retail investors. The firms were selected based on disclosures of disciplinary events. The Supervision Initiative was announced as part of the 2016 Examination Priorities.

With credit to OCIE, they use the results of these initiatives to guide firms on how to improve their compliance programs. This Risk Alert has five suggestions for firms that have an employee with disciplinary histories.

1. Adopt written policies and procedures that specifically address what must occur prior to hiring supervised persons that have reported disciplinary events. Those procedures should trigger investigations of the disciplinary events and ascertain whether barred individuals were eligible to reapply for their licenses.

2. Enhance due diligence practices when hiring to identify disciplinary events. Conducting background checks on employment histories, disciplinary records, financial background and credit information. Conducting internet and social media searches.

3. Establish heightened supervision practices when overseeing supervised persons with disciplinary histories. The staff found that advisers with written policies and procedures specifically addressing the oversight of supervised persons with disciplinary histories were far more likely to identify misconduct by supervised persons than advisers without these written protocols.

4. Adopt written policies and procedures addressing client complaints related to supervised persons. The staff observed that advisers with written policies and procedures addressing client complaints related to their supervised persons were more likely to have reported the receipt of at least one complaint related to their supervised persons. In addition, these advisers were consistently more likely to escalate matters of concern raised in these complaints than advisers without written protocols.

5. Include oversight of persons operating out of remote offices in compliance and supervisory programs, particularly when supervised persons with disciplinary histories are located in branch or remote offices. Don’t let out of sight mean out of mind.

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Bad Boys The SEC is Coming For You: Supervision Initiative

The SEC’s Office of Compliance Inspections and Examinations’ 2016 Examination Priorities included a focus on individuals with a history of disciplinary events. That priority has been put into action. The SEC issued a new Risk Alert on upcoming examination.

OCIE is undertaking an initiative to examine the supervision practices and compliance programs of registered investment advisers that employ individuals with a history of disciplinary events in the financial services sector. OCIE is calling the new initiative: the “Supervision Initiative.”

Okay so the name is a bit ambiguous. I suppose I may be the only one that it is looking for more interesting names:

  • Downed Hawks
  • Bad Boys
  • Operation Tiger Pit

The Supervision Initiative likely means that firms with bad boys and women are more likely to be subject to examination.

The Supervision Initiative examinations will assess such advisers’ business and compliance practices related to the firms’ supervision of higher-risk individuals in four areas:

Compliance Program “An important component of the examinations is to evaluate whether the advisers foster robust compliance cultures and tone at the top. The tone at the top is critical to setting the ethical environment of the organization and preventing misconduct.”

Disclosures. “Examiners will likely review registered advisers’ practices regarding their disclosures of regulatory, disciplinary, or other actions with a focus on assessing the accuracy, adequacy, and effectiveness of such disclosures.”

Conflicts of Interest. “Particular attention will be given to conflicts that may exist with respect to financial arrangements (e.g. unique products, services, or discounts) initiated by supervised persons with disciplinary events.”

Marketing “Examiners will review a registered adviser’s advertisements including pitch-books, website postings, and public statements to identify any conflicts of interests or risks associated with supervised persons with a history of disciplinary events.”

I would guess that the SEC is looking for firms to have taken extra steps to ensure that those who have transgressed in the past are in better supervision and in a firm that stresses good behavior.

As the SEC insists in disclosures past performance is not indicative of future results. But I think the SEC believes that those who have violated the rules in the past are likely to do so again.

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