Episode 54: OCIE Risk Alert Part 1

On episode 54 Part 1 we discuss the recent OCIE Risk Alert. 



CCO Buzz: Hello and welcome back to the Buzz! This week on Episode 54, we will be discussing the recent risk alert, “Observation from Examination of Investment Advisers: Compliance, Supervision, and Disclosure of Conflicts of Interest” issued by OCIE. This is a big topic to cover, so we will be splitting today’s episode into two parts. Let’s get started now with part one.

The recent Risk Alert, “Observation from Examination of Investment Advisers: Compliance, Supervision, and Disclosure of Conflicts of Interest,” focuses on big concepts that pertain to firm’s compliance programs- is there a particular area where you feel CCOs should focus on based on the SEC’s findings within the Alert?

Tito Pombra: Yes, like any other SEC alert this is an important alert, and the alert mainly focuses on the design and implementation of compliance and supervision specifically when hiring and employing supervised persons with disciplinary histories. What firms should focus on from this Risk Alert are the necessary adjustments to adopt in order to ensure their Policies and Procedure Manuals address those risks.

In particular, firms should consider heightened supervisory procedures for certain disciplinary events, such as those related to “misappropriation, unauthorized trading, forgery, bribery, and making unsuitable recommendations.”

In addition, firms should consider reviewing all of their conflicts of interest disclosures made by the supervised persons to review and ensure that you are mitigating controls to manage those conflicts.

CCO Buzz: Alright, within the Risk Alert, OCIE observed that almost half of the disclosure-related deficiencies were related to omissions – often because the advisers relied solely on the self-reporting of potential new employees. Do you have suggestions or recommendations for hiring individuals with a history of disciplinary events, such as new hiring policies and procedures, investigating disciplinary events, or other suggestions?

Tito Pombra: Yes absolutely. The willingness and proactive approach to adjust a firm’s Policy and Procedures for hiring supervised person with disciplinary history is a good place to start.

From my standpoint, I (would) strongly recommend firms to conduct third-party background checks as part of (the) onboarding process. If a candidate is a FINRA license holder, BrokerCheck reviews should be part of the hiring process.

Firms should also request (that) potential talent provide copies of their Form U5, but also review their Form U5 filings after 30 or more days after hire, to help identify any termination notices they failed to disclose.

Also, as part of the background check process, firms should implement a comprehensive Google query search to review the new hire, and now a days reviewing social media activity is integral in the selection of new talent. Firms will also want to request and verify the candidate’s references, as well as and validate any information provided on their resumes.

Although background reviews should be completed periodically; which should include checking and rechecking the CRD/IARD for supervised persons’ filings, firms will want to ensure they are in-depth and thorough to ensure complete employee disclosure.

CCO Buzz: And in regards to investigating a disciplinary event, do you have any recommendations?

Tito Pombra: So, if a firm decides to hire or employ a person with disciplinary histories, they should consider the following:

  • Requiring investigations of disciplinary events and discern whether barred individuals are still eligible to reapply for their licenses
  • Establishing an escalated or heightened supervisory policy when overseeing persons with certain disciplinary histories and a procedure for addressing risks associated with them
  • Adopting overall written policies and procedures for addressing client compliance related to supervised persons; as well as
  • Include oversight of persons operating out of remote offices in compliance and supervisory programs, specificly when said supervised persons with disciplinary histories are working in remote offices.

CCO Buzz: That’s all for Part 1 of Episode 54. Thanks for joining, and don’t miss Part 2, on the next Episode of the CCO Buzz.

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