SEC to Examine RIAs Hiring Advisers with Checkered Pasts
(Updated with additional comments in final two paragraphs.)
Registered investment advisers who have opened the door to employees who have “a history of disciplinary events” could face additional examination scrutiny as part of a Securities and Exchange Commission sweep announced on Monday.
The SEC’s Office and Compliance Inspections and Enforcement will begin examining firms that have a history of hiring people who have been barred from the brokerage industry or have other disciplinary markets on their records, the regulator said in a “Risk Alert” aimed at warning firms of problem areas.
“Such individuals may present an increased risk of future misconduct, and thus can present harm to clients,” the alert said. “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.”
The initiative in the investment advisory community mirrors attempts by the Financial Industry Regulatory Authority Inc. in the last three years to police brokerage firms with histories of hiring recidivist brokers, as announced in its 2014 examination priorities letter. The SEC delegates Finra to regulate broker-dealers and their employees but along with state regulators directly oversees investment advisers who are registered under a different statute than brokers.
The OCIE alert cited a February academic study that found 44% of fired brokers found re-employment in the securities industry within a year.
The SEC will review RIAs’ hiring processes, oversight of employees and complaint-handling processes as part of its review, the alert said. Examiners will focus on the “tone at the top,” the announcement said, echoing language used by Finra executives in discussing its focus on firm culture as a crucial operating element.
Examiners will review regulatory filings and marketing materials to ensure that firms properly disclose reportable disciplinary events on advisers’ records.
In addition, the SEC will scrutinize conflicts of interest, with particular attention given to “financial arrangements” related to products, services, or discounts that advisers with disciplinary events initiate, the OCIE alert said.
Brian Hamburger, an attorney whose firm MarketCounsel helps brokers set up RIAs, criticized the initiative as a “diversion of resources” that would discourage firms who lawfully employ previously-reprimanded individuals.
“The time to impose sanctions on violating representatives is at the time of the wrongdoing, not by way of a tax upon those firms that hire representatives with some type of disciplinary history,” Hamburger said in an emailed statement.