Advisers Must Thoroughly Investigate Client Complaints to Avoid Claims of Failure to Supervise

Investment advisers are required to adopt and implement policies and procedures reasonably designed to prevent employee violations of the federal securities laws and to supervise employees in connection therewith. An investment adviser recently ran afoul of both of those fundamental requirements by failing to follow up on two client complaints that, the SEC claimed, should have led the adviser to thoroughly investigate one of its representatives who was allegedly defrauding the adviser’s clients by lying to them about the amount of management fees that they were paying and by misappropriating client funds to support an outside business in which he had a financial interest. This article analyzes the settlement order. See “OCIE Issues Risk Alert on Advisers’ Oversight of Employees With a History of Disciplinary Events” (Aug. 29, 2019); and “The Duty to Supervise: Recent SEC Enforcement Actions Claim Violations by Broker-Dealers and Investment Advisers (Part One of Three)” (Sep. 6, 2018).

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