SEC says hire a bad apple, we’ll chop down your tree!

FINRA to Deutsche Bank Securities: “Haben Sie $12.5 Million?
September 7, 2016
Gee whiz! Fraudulent marketing cost one “whiz kid” $1.5 million
September 21, 2016

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.”

Holy cow!

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:

  • Your compliance Examiners will check out your written supervisory procedures, including your practices surrounding your hiring processes, ongoing reporting obligations, employee oversight practices, and complaint handling processes. They’ll be looking to see whether you are fostering “robust compliance cultures and [compliant]tone at the top, which the SEC considers “critical to setting the ethical environment of the organization and preventing misconduct.”
  • Truth-telling…or disclosures. If one of your people has a problematic past, you have to make sure everyone The SEC calls it a “full and fair disclosure of all material facts.” If something happened, you have to say something. Sins of omission are…in fact, sins! The examiners will likely review your practices regarding disclosures of any regulatory, disciplinary, or other actions with a focus on assessing the accuracy, adequacy, and effectiveness of such disclosures.
  • Conflicts of Interest. Examiners will be assessing the conflicts of interest that a registered advisor or supervised person may have and paying particular attention to conflicts that may exist with respect to financial arrangements initiated by supervised persons with disciplinary events.
  • Marketing. Examiners also plan to review your advertisements including pitch-books, website postings, and public statements to identify any conflicts of interests or risks associated with an employee with a history of disciplinary events.

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.

Got questions? Then, let’s talk (212-233-1155). Ask about Patrina’s comprehensive compliance solutions and compliance recordkeeping specifically designed for the financial services community.

Let’s talk.

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