FYI: OCIE has issued a Risk Alert addressing the results of its Supervision Initiative, which in 2017 assessed the oversight practices of more than 50 SEC-registered IAs that previously employed, or currently employ, individuals with a history of disciplinary events. The Initiative focused on advisers’ compliance programs and supervisory oversight, disclosures and conflicts of interest on a firm-wide basis, although particular emphasis was placed on previously-disciplined individuals.
According to the Risk Alert, nearly all of the examined IAs received deficiency letters, the vast majority of which related to compliance issues, but many related to disclosure issues, including undisclosed conflicts of interest.
OCIE staff observations about disciplinary histories included:
• Failures to make full and fair disclosure about previously-disciplined individuals, such as stale, incomplete, confusing, or misleading disclosures made regarding disciplinary events, often because the IA relied solely on the individuals to self-report to the IA about disciplinary matters.
• Failures to adopt effective compliance procedures that addressed the risk of employing previously-disciplined individuals, such as failures to have reasonably designed procedures to ensure self-reported information was accurate and complete.
Observations about more generalized deficiencies included:
• Failures to adequately design and implement supervisory and compliance systems to supervise, oversee and monitor supervised individuals, including lack of oversight with regard areas such as fees charged, advertising practices and practices of individuals working remotely.
• Failures to disclose conflicts, which included compensation arrangements with conflicts that could have impacted the impartiality of the advice the supervised persons gave to their clients.
The Risk Alert also includes a helpful section outlining some of the compliance and supervisory procedures OCIE staff observed at certain advisers that may help other firms address the weaknesses discussed in the Risk Alert.
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