On September 12, 2016, OCIE published a National Exam Program Risk Alert announcing an initiative to examine the supervision practices of registered investment advisers (“RIAs”) that employ individuals with a history of disciplinary events in the financial services sector (the “Supervision Initiative”). OCIE intends to assess RIAs’ business and compliance practices, with a particular focus on those practices related to their supervision of “higher-risk individuals.” According to OCIE, persons with regulatory disciplinary histories may pose increased risks to advisory clients.
The Supervision Initiative will assess whether RIAs have implemented policies and procedures specific to the risks presented by employees with disciplinary histories. Examinations will focus on those advisers’ compliance cultures and “tone at the top.”
The Supervision Initiative examinations will include the following key areas:
- Compliance Program. Examiners will review an RIA’s practices surrounding its hiring processes, ongoing reporting obligations, employee oversight practices, and complaint handling processes under Rule 206(4)-7 under the Advisers Act, including whether the RIA fosters a robust compliance culture.
- Disclosures. Examiners will likely review the RIA’s practices regarding its disclosures of regulatory, disciplinary, or other actions, with a focus on assessing the accuracy, adequacy, and effectiveness of such disclosures, including those on the RIA’s Form ADV.
- Conflicts of Interest. Examiners will assess the RIA’s or supervised persons’ conflicts of interest, with a particular focus on conflicts that may exist with respect to financial arrangements (g., unique products, services, or discounts) initiated by supervised persons with disciplinary histories.
- Marketing. Examiners will review the RIA’s advertisements, including pitchbooks, website postings and public statements, to identify any conflicts of interest or risks associated with supervised persons who have a history of disciplinary events.
The Supervision Initiative should come as no surprise to RIAs, since OCIE alluded to the initiative and its use of data analytics in its Examination Priorities for 2016, which we wrote about here. The Supervision Initiative also mirrors, to some extent, FINRA’s interest this year in “compliance culture,” which similarly emphasized the issues surrounding the hiring of individuals with disciplinary records. While many RIAs are already sensitive to hiring individuals with disciplinary histories, firms should review their hiring records to determine if they are likely to draw OCIE’s attention. Firms should also review their compliance policies and procedures to ensure that they are robust, identify high-risk individuals, and mitigate the risks that these individuals may pose.