SEC Charges Adviser with Failing to Supervise Jailed Rep
The SEC has commenced proceedings against an adviser and its principal for failing to supervise an investment adviser representative who went to jail for stealing from clients.
The adviser’s business model involved retaining independent contractor IARs who worked from remote locations. As far back as 2014, FINRA, as well as compliance consultants and compliance officers, identified more than half of the firm’s IARs as high risk. Nevertheless, the adviser and the principal failed to implement heightened supervisory procedures. The IAR at issue stole over $700,000 from clients by arranging distributions to his unchecked outside business activities. A compliance officer had specifically recommended the firing of the IAR for failing to follow due diligence procedures, but the principal accepted his self-serving explanation.
Both the SEC and FINRA have targeted firms that retain bad brokers. We would counsel against retaining reps with a disciplinary history. If you do hire tainted reps, make sure to implement strict and heightened supervisory procedure to ensure that your new rep does not become a recidivist.
Read SEC Order here.