RIA Experiences the Horror of Failure to Supervise Remote IARs

Registered investment advisers that rely on independent investment adviser representatives (IARs), operating their own offices, face unique supervision challenges. The SEC’s administrative action against Horter Investment Management, LLC (“Horter”) and its principal illustrates the worst-case scenario. The firm, based in Cincinnati, primarily hired IARs with remote offices. One of those IARs, Kimm Hannan (“Hannan”), was hired despite a red flag on his Form U5. About the same time, the SEC issued a deficiency letter to Horter citing that the firm’s supervisory structure was inadequate to supervise its remote IARs. Long story short, Hannan is serving a 20-year sentence in jail for stealing more than $700,000 from clients, and now the SEC is looking at the firm and its principal.

The takeaways from this case include (1) establish and follow policies and procedures to supervise the activity of IARs operating remotely, (2) establish and follow heightened-supervision procedures for IARs with black marks, (3) read and follow up on the findings from the annual review of the compliance program, and most importantly, (4) do not ignore the compliance officer’s advice. Contributed by Cari Hopfensperger, Senior Director. SOURCE