SEC Will Examine Firms that Hire Previously-Disciplined Advisers and Brokers
The SEC’s Office of Compliance Inspections and Examinations has launched a “Supervision Initiative” to examine supervision practices of investment advisers that employ previously-disciplined advisers or brokers. OCIE will focus on a firm’s compliance practices including its policies and procedures for hiring, reporting, oversight, and complaint handling. The staff will also review disclosures, conflicts of interest, and marketing materials. The Supervision Initiative cites a recent study concluding that reps with a disciplinary history are 5 times more likely to engage in misconduct (See https://www.cipperman.com/2016/03/04/academic-study-reports-widespread-financial-adviser-misconduct/.)
OUR TAKE: The SEC wants to discourage firms from hiring disciplined advisers and brokers. This sweep puts the burden on such hiring firms to prove that they can prevent future violations.