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OCIE Releases Findings After Examining Firms Employing Persons with Disciplinary Histories

OCIE Releases Findings After Examining Firms Employing Persons with Disciplinary Histories


On July 23, 2019, the Office of Compliance Inspections and Examinations (OCIE) released a Risk Alert which outlines the findings of examinations of over 50 advisers in 2017. All the examined advisers were selected based on their employment of individuals with previous disciplinary events. Throughout the examinations, OCIE specifically focused on whether compliance programs were adequately designed to handle previously disciplined individuals, whether there were appropriate disclosures on required documentation, and whether certain conflicts of interest were properly addressed.

Many advisers were observed to have insufficient compliance policies and procedures in place to address the risks of employing persons with disciplinary histories. Often, advisers had no system for checking whether potential employees’ self-attestations regarding disciplinary events were accurate and all-encompassing. In some cases, disciplinary events were neglected to be reported entirely. Some firms’ compliance policies and procedures were found not to be consistent with actual business practices, including those regarding compensation arrangements or duties assigned to certain persons.

Staff also focused on quality of disclosures in documents and filings, specifically those addressing disciplinary events. Many of the deficiencies resulted from individuals failing to disclose their own disciplinary histories, partial or confusing information about disciplinary events, and failures to update Form ADV or other documentation after new disciplinary events.

Another focal point was issues concerning material conflicts of interest that could impact advisory relationships. At times, advisers failed to disclose conflicts of interest that affected compensation arrangements. For example, some employees were required to personally incur expenses when completing client transactions, creating an incentive to trade less frequently. However, this circumstance was not made clear to clients.


Of the group examined, OCIE staff issued a deficiency letter to nearly every adviser. OCIE staff encourages advisers to acknowledge the risks of employing individuals with a disciplinary history and to adopt and implement policies and procedures which address these issues. Some of the compliance gaps identified in this report can be filled by strengthening the due diligence process when hiring employees, enhancing supervision of employees with disciplinary histories, implementing policies and procedures for tending to client complaints, and conducting additional oversight of employees working in remote or branch locations.

Maintaining a well-rounded and comprehensive compliance program is essential to your firm’s operations. Staying aware of OCIE’s recommendations, like those above, and being proactive in updating compliance practices can help keep your firm from encountering disciplinary events. Fairview is available to answer questions about OCIE’s recent findings and how they may affect your firm.