The Office of Compliance Inspections and Examinations (OCIE) released a risk alert outlining findings of examinations it conducted as part of its Supervision Initiative. In 2017, OCIE performed examinations of 50 advisers who had either previously employed, or currently employ individuals with a history of disciplinary events. The advisers collectively managed over $50 billion in assets and managed over 220,000 clients.
Nearly all of the advisors received a deficiency letter relating to compliance or disclosure issues, including disclosures of conflicts of interest.
Compliance Policies and Procedures: Hiring New Employees
Many advisers received deficiency letters for omitting information about employees’ disciplinary events, including the total number of events, dates, allegations, fines, judgments, awards, or disciplinary sanctions. Relying on self-reporting from candidates during the hiring process proved to be a practice that was problematic for advisers.
It is crucial for firms to update Compliance Policies and Procedures to integrate resources and streamline processes with Human Resources Departments in order to develop a strong vetting process for candidates during the hiring process. Effective policies will include smartly designed questions during the interview process that will help advisers discover any problematic histories.
In addition to interviews and documents that candidates must provide or complete, it is also recommended that advisers perform the following actions to identify potential issues a candidate has neglected to disclose:
- Conduct third-party background checks
- Conduct an inquiry into financial background and credit history
- Request that candidates provide copies of Form U5
- Request that candidates submit fingerprints (depending on state and jurisdiction)
- Conduct comprehensive Google and Social Media searches
- Request and call candidate references
- Verify employment history, educational degrees and certifications
- Conduct BrokerCheck reviews for FINRA license holder candidates
- Check CRD/IARD for filings
It is also recommended that advisers perform follow up reviews of the Form U5 filings 30 days or more after the hire date and the CRD/IARD filings three months after the hire date to verify that the information has not been updated.
Advisers are encouraged to develop specific policies and procedures to follow in the instance that the firm decides to hire individuals who have had a disciplinary history. These policies may include an investigation into the disciplinary event and an inquiry into whether barred individuals are eligible to reapply for licenses.
OCIE also recommends that firms develop specific, “heightened” supervisory practices for overseeing individuals with disciplinary histories that include actions such as misappropriation, unauthorized trading, forgery, bribery, and making unsuitable recommendations.
Compliance Policies and Procedures: Supervising Employees
During the Supervision Initiative examinations, OCIE additionally identified supervisory deficiencies that were attributed to firm-wide practices that were not specific to supervising employees with disciplinary histories.
Firms are encouraged to update their Compliance Policies and Procedures to include detailed responsibilities and expectations for supervised employees. Further, it is recommended that leadership monitor that supervisors are implementing the policies and procedures, properly overseeing and documenting that their employees are meeting the outlined standards of business conduct.
OCIE specifically recommended several actions to include in policies and procedures regarding responsibilities for supervisors to implement and document:
- Oversee that supervised employees disclose relevant fees and deliver promised services
- Monitor that advertising and web site content comply advertising rule requirements
- Review and document the appropriateness of any client accounts opened by supervised employees and any assessments that took place
- Maintain a true, accurate, and current list of all accounts
- Perform and document annual reviews, including an assessment of any risk areas identified for the firm
- Address and document client complaints
OCIE staff observed that several of the examined advisers had undisclosed conflicts of interest – specifically relating to compensation agreements that could influence advice they gave to clients. Some had forgivable loans made contingent upon client-based incentives. Others required that the supervised persons incur all of the transaction-based charges, which could cause employees to pause before recommending or completing trades on behalf of clients.
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Jacko Law Group, PC can assist your firm in assessing, updating and customizing your firm’s compliance program, identifying and properly disclosing conflicts of interest and other risk management practices. Contact the attorneys at Jacko Law Group, PC, here.
- Senior Associate
Mr. Boeche provides strategic legal counsel to investment advisers, broker-dealers, private funds and other financial professionals. Mr. Boeche advises clients on all aspects of formation, registration, and ongoing ...
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