Firms Relying on Fired Advisers Scrutinized

     (CN) – Firms relying on investment advisers with disciplinary records will be greatly scrutinized this year, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations said Monday.
     Financial advisers with disciplinary histories are five times more likely to engage in misconduct than the average financial adviser, according to a February National Bureau of Economic Research study. While approximately half of the offenders lose their jobs after the misconduct, 44 percent of the offenders are reemployed in the financial services industry within one year, it continues.
     Citing the study and saying such individuals “may present an increased risk of future misconduct, and thus can present harm to clients,” the OCIE has released a “risk alert,” promising increased scrutiny of firms who rely on investment advisers with disciplinary records.
     Although the misconduct study focused on FINRA-registered broker-dealer representatives (financial advisors), “its principal conclusions regarding recidivist misconduct are relevant to investment advisers,” according to the risk alert. FINRA, the Financial Industry Regulatory Authority, is a self-regulating body meant to oversee U.S. stockbrokers and brokerage firms.
     SEC’s office of compliance intends to conduct examinations of principals and officers of registered investment advisers that employ or contract with supervised individuals with a track record of misconduct, the alert states.
     The audits 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 individuals after they have been disciplined or barred from a broker-dealer, the alert continues.
     According to Section 202(a)(25) of the Investment Advisers Act of 1940, a “supervised person” can be “any partner, officer, director (or other person occupying a similar status or performing similar functions), or employee of an investment adviser, or other person who provides investment advice on behalf of the investment adviser and is subject to the supervision and control of the investment adviser.”

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