SEC IA Examination Observations

• Observations from examinations of investment advisers (IAs), covering areas of disciplinary histories, compliance program, supervision, conflicts of interest disclosure.
• Key takeaway: IAs should analyze risks of hiring supervised persons (SPs), who have disciplinary histories, and adopt policies and procedures to address those risks.

Disciplinary Histories

• Gaps in oversight of SPs having disciplinary histories by failing to disclose disciplinary events or histories to clients, often relying on SP self-reporting that made disclosure.
• If disclosure made was late, incomplete, confusing, misleading; or failed to update.
• Many IAs did not adopt or implement compliance policies and procedures addressing risks associated with hiring and employing individuals with prior disciplinary histories.

Compliance and Supervision

• Failed to adequately supervise, set appropriate standards of business conduct for SPs.
• Did not sufficiently document SP responsibilities or outline the expectations of them.
• Many IAs could not confirm SPs identified in procedures as responsible for performing certain compliance functions were actually executing the duties as prescribed therein.
• Duties included key regulatory, business functions for IAs managing investor assets.
• Some policies, procedures inconsistent with actual business practices or disclosures.
• Areas with most frequent inconsistencies involved commissions, fees, and expenses.
• Annual compliance review not documented adequately, not assess risk areas for firm.

Disclosure of Conflicts of Interest

• Undisclosed compensation arrangements, which resulted in conflicts of interests.
• For example, not disclosing forgivable loans were made to IA or their SPs contingent upon certain client-based incentives, that may unduly influenced decision-making.
• Also, resulted in higher fees and expenses for the affected clients, or in some both.

Improving Compliance

• Adopt written policies and procedures that specifically address what must occur prior to hiring supervised persons that have reported to the adviser disciplinary events.
• Enhanced due diligence practices associated with hiring SPs to identify disciplinary.
• Heightened supervision practices when overseeing SPs who have certain histories.
• Adopt written policies and procedures addressing client complaints related to SPs.
• Oversight of persons operating out of remote offices in compliance and supervisory.