SEC to examine RIAs who hire disciplined, barred brokers

Agency says it will pay particular attention to firms that employ advisers with rogue histories at broker-dealers to ensure the hires are properly supervised

Sep 12, 2016 @ 2:43 pm

By Jeff Benjamin

Registered investment advisory firms that employ brokers with disciplinary histories have specifically moved into the crosshairs of Securities and Exchange Commission examiners.

The SEC's Office of Compliance Inspections and Examinations announced Monday it will be paying particular attention to firms that hire advisers with rogue backgrounds to ensure those advisers are being properly supervised.

The SEC did not respond to a request for comment, but the enhanced oversight could have multiple effects on advisory firms, according to regulatory specialists.

“It will significantly effect a small percentage of firms, and I think firms will look more closely at individuals with disciplinary histories,” said Brian Rubin, partner at the law firm Sutherland, Asbill & Brennan.

The increased focus on firms employing advisers with disciplinary histories follows similar oversight by Financial Industry Regulatory Authority of broker-dealers.

Daniel Nathan, partner at the law firm of Morvillo, said advisory firms are probably already on the lookout for spotty disciplinary records in their hiring practices, but this enhanced focus could make it even harder for some advisers or former brokers to find work in the advice business.

“The focus seems predictable to me,” said Mr. Nathan. “Firms are required to have procedures in place that are adequate to identify risk, which includes employees with disciplinary histories. The SEC wants to make sure you have identified the potential harm, develop a plan to mitigate the risk, and put the plan in place.”

In terms of the chilling effect on new hires, Mr. Nathan said, “It's already there.”

“Most advisory firms are, by and large, pretty sensitive to those issues,” he added. “The really big firms have very limited tolerance for a disciplinary history.”

According to the SEC's announcement, the OCIE staff intends to conduct examinations of RIAs that employ or contract with supervised persons that have a history of disciplinary events. The exams will focus on evaluating the effectiveness of advisers' compliance programs, supervisory oversight practices, and disclosures to clients and prospective clients, particularly relating to the potential risk associated with financial arrangements initiated by supervised persons with a disciplinary history.

Amy Lynch, president and co-founder of the compliance and consulting firm, FrontLine Compliance, said the enhanced focus on disciplinary histories is the result of improved analysis techniques and technologies.

“They are looking at better ways to use the resources they have, and they're finding new ways of slicing and dicing and analyzing the information,” she said. “If you hired a new sales person that used to be at a broker-dealer and has a disciplinary history, and you deem it to be minor and not relevant to what your firm does, you could very well be a target of this type of exam.”

Even though advisory firms are already likely paying attention to the disciplinary histories of employees, Mr. Nathan said the SEC will get lots of bang for the buck by making its enhanced efforts public.

“They know they can't get to everybody, so something like this has to create a heightened awareness,” he said. “Plus, it has the added benefit of telling the lawmakers that they are on the job.”


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