The Securities and Exchange Commission’s exam division plans to launch an exam sweep of registered investment advisors that employ or contract with supervised persons with a disciplinary history.
In its Monday Risk Alert, the SEC’s Office of Compliance Inspections and Examinations (OCIE) stated such individuals “may present an increased risk of future misconduct, and thus can present harm to clients.”
The exams are expected to begin fiscal 2017, which starts Oct. 1, 2017.
SEC staff will pick which advisors to examine based on:
• Disciplinary information that is reported on an advisor’s Form ADV.
• Information about other legal actions (e.g., private civil actions) not required to be reported on Form ADV, but which is nonetheless relevant to the advisory services offered to clients.
• Information from SEC enforcement actions that barred or suspended individuals from certain financial industries.
Exams under the “Supervision Initiative” will focus on evaluating the effectiveness of 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 supervised persons with a disciplinary history, the SEC said.