That is the question that the SEC has essentially posed for registered investment advisers in a National Exam Program Risk Alert. In doing so, the SEC has stated that it will be “examining compliance oversight and controls of registered investment advisers that have employed or employ individuals with a history of disciplinary events . . . .”
The SEC will essentially be examining the investment advisers business and compliance practices, particularly focused on higher risk individuals. Does this mean that you should not hire or retain someone who may have a disciplinary past?
Of course, not. Instead, this alert should be telling you that such people, if you do decide to hire (or retain) them, should come under some form of heightened supervision for a period of time, if not forever. But be forewarned that the SEC is going to check up on you by reviewing certain information, including the following:
- Your compliance program , including the practices surrounding the hiring and ongoing reporting obligations of investment adviser representatives.
- The firm’s disclosures (i.e., Form ADV) that it makes to its customers to ensure that they are accurate.
- The conflict of interest that the firm discloses.
- The firm’s marketing.
By reviewing these areas, the SEC believes that it can better understand how firms are handling and representing advisers with a past to their customers. If you decide to hire or retain such advisers, you should focus on what you are saying to the public about them through your words and actions before you are in the SEC doghouse following an examination.