Compliance, Supervision, and Disclosures

Beginning in 2017, the United States Security and Exchange Commission (“SEC”) initiated a series of examinations aimed at compliance policies and procedures regarding individuals within these firms that had a prior disciplinary history.

The Importance of a “Compliance Culture”

The SEC has previously expressed concerns about the “tone at the top” and whether there is adequate “compliance culture” in advisory firms. This exam initiative established a methodology for identifying if these compliance guidelines are indeed being applied in advisory firms, especially pertaining to the supervision of registered personnel with a disciplinary history.

The focus of the initiative was to identify if firms had adequate supervision, acceptable policies and procedures, and appropriate disclosures regarding these individuals. Adequate policies and procedures and a “compliance culture” are the cornerstone of any compliance program. This exam initiative added another layer of complexity by focusing on individuals with previous disciplinary histories. However, the core of this exam initiative was to observe the supervision in firms in conjunction with their policies and procedures.

What are the Key Recommendations?

As a result of this initiative, the SEC identified some key areas of concern and recommendations in their OCIE Risk Alert released on July 23, 2019. These observations focused on the supervision of registered representatives with disciplinary histories. The SEC also examined the overall effectiveness of the compliance programs within the firm.

A few of the noteworthy issues highlighted by the SEC included whether there were procedures in place to conduct due diligence for the hiring of individuals with a disciplinary history and whether the appropriate conflicts and disclosures were addressed. Through these examinations, the SEC identified areas that firms should consider implementing into their compliance programs. For example, a thorough background check and a review of the person’s U5 filings, at a minimum. It is also prudent to conduct more due diligence, such as whether designations are current. If a potential candidate has a disciplinary history, then additional investigations may be warranted.

The supervision issues identified in these firms examined are valuable reminders for CCOs and CEOs regarding the need for supervision, policies and procedures, and due diligence around the hiring of all supervised persons. A few of the SEC suggested areas for consideration are “conducting personal background checks,” “confirming employment histories,” “financial and credit background checks,” “review of disciplinary records,” and “reviewing U5 and the CRD filings.”

A Roadmap for Improving Compliance Programs

Although the focus of this exam initiative pertains to supervised persons with a disciplinary history, it is a great reminder that the “tone at the top” and the “compliance culture” are still important elements to consider when reviewing and updating a compliance program. Also, firms should have good supervision guidelines and procedures on “addressing client complaints related to supervised persons.”

These types of initiatives provide firms with more insight into the expectations of the SEC. It can also be a roadmap to assist CCOs with areas of focus for improving their compliance programs. In conclusion, even if your firm does not hire employees with disciplinary histories, the lessons learned in this initiative are valuable to understanding ways to improve your firm’s compliance program.

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