Okay. The Securities and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations (CIE) didn’t use those exact words…But in its September 2016 Risk Alert, it did say it “intends to conduct examinations of registered investment advisors that employ or contract with supervised persons that have a history of disciplinary events.”
If you hire someone with a track record of “disciplinary events,” including being barred from being a broker-dealer, the OCIE says be forewarned that it is launching an initiative to examine your supervision practices and compliance programs.
The CIE believes that such individuals “may represent an increased risk of future misconduct” and wants to focus on evaluating the effectiveness of your advisors’ compliance programs, supervisory oversight practices, and disclosures to clients and prospective clients, particularly relating to the potential risk associated with financial arrangements initiated by that supervised persons with a disciplinary history.
How will the CIE find you?
The OCIE staff will be tapping into SEC databases and filings, “as well as external sources…”
The initiative will focus on four key risk areas:
Making rehab harder?
Will this new focus have a chilling effect on hiring? You betcha! Should it? That’s a difficult question to answer. It does make it more difficult for a rehabilitated former bad apple to get back into the pie — especially when they’re wearing a permanently tattooed scarlet letter. Is their only hope to practice flipping burgers? In some cases, that would be a shame. Akin to “throwing the baby out with the bathwater.” So, if you are hiring the best possible person for the job, just make sure you’ve got a strong compliance infrastructure in place. Make sure you’re already doing everything the SEC’s CIE is asking.