Wolves of Wall Street, beware!
The Securities and Exchange Commission is taking steps to improve its oversight of thousands of registered investment advisors, or RIAs, which operate under the SEC’s guidance.
The Commission announced last month that it will soon launch exams to test the compliance oversight and controls of firms that hire investment advisers with a disciplinary history.
The SEC stated in a “Risk Alert” report that such “ individuals may present an increased risk of future misconduct, and thus can present harm to clients,”.
According to the SEC risk alert, the “exams will target advisory firms that have hired or contracted individuals with histories of disciplinary events in the financial services sector, including representatives who have been disciplined or barred from a broker-dealer”. SEC staff is “identifying candidates using information reported on firms’ Form ADV, which is used to disclose certain disciplinary events, as well as information from other legal actions and SEC enforcement actions.”
The SEC said the exams will assess whether advisors have implemented procedures specific to the risks presented by employees who have disciplinary histories. The SEC will focus in part on firms’ compliance programs, including whether the firms foster a “robust compliance culture and ‘tone at the top.’”
“The tone at the top is critical to setting the ethical environment of the organization and preventing misconduct,” the SEC said.
It appears that securities regulators are at last taking into account the importance of culture at firms that sell securities to the investing public.
Earlier this year, the Financial Industry Regulatory Authority, or FINRA, launched a target examination designed to evaluate the culture at brokerage firms, according to InvestmentNews, an industry trade paper.
FINRA, which oversees securities houses like Morgan Stanley and Merrill Lynch, posted eight questions on its website that the organization’s examiners will use to assess a firm’s “cultural values” and how they influence their ability to adhere to securities rules.
Brokerage firms will be asked to summarize how they establish, implement and measure policies that form their culture, how they find and respond to compliance violations, and how they identify rogue “subcultures.”
FINRA has a well-established record of weeding out bad brokers. The SEC’s new exam system is a step in the right direction for identifying and then eliminating equally unscrupulous advisers. And both FINRA’s and the SEC’s emphasis on sound corporate culture is welcome.
In addition, the SEC will focus on potential conflicts at RIAs.
The SEC’s initiative will also probe “conflicts of interest,” with special attention to conflicts arising with respect to unique products or services initiated by representatives with disciplinary histories. “SEC examiners will also look at firms’ marketing materials to identify any conflicts of interest or risks associated with individuals who have a history of disciplinary events, the risk alert said.”
It’s about time that RIAs, which owe a fiduciary duty to their investor clients, were subject to greater oversight for investment fraud and elder abuse.
Perhaps, just perhaps, one day in the future there will be a safer environment for elderly and retired investors. And that’s bad news for the Wolves of Wall Street.
Zamansky LLC are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.