OCIE RISK ALERT – Insight Into Supervision Related Expectations

Last week, the SEC shared feedback in a Risk Alert, Observations from Examinations of Investment Advisers: Compliance, Supervision, and Disclosure of Conflicts of Interest (“ the Alert”).

The Alert was based on 50+ examinations of advisers that, collectively, manage approximately $50 billion of primarily retail assets. Advisers were targeted for review based on disciplinary events and other legal actions involving their supervised persons, including legal actions not required to be reported on Form ADV (e.g., private civil actions). The exams focused on advisers’ practices in certain areas, including supervisory oversight, disclosures and conflicts of interest.

This is an interesting Alert as it raises some interesting things to think about and is not just a rehash of things we have already heard. OCIE is encouraging advisers to consider any risks presented by employing supervised persons with disciplinary histories and whether policies and procedures need to be amended to address those risks.

All firms, including those with few employees, and those experiencing rapid growth, should perform due diligence on new hires and when appropriate, perform additional supervision of employees that pose higher risk as part of their oversight program. For example, an adviser’s risk assessment should always consider their employees and who might warrant more oversight. Supervised persons with a predominantly marketing function generally pose different risks than portfolio managers, especially in the retail space. In addition, employees who engage in more personal trading or who have access to funds should pique the interest of a CCO.