Agency will look at whether investments, IRA rollovers are suitable or in clients’ best interest.
The Securities and Exchange Commission will be watching out for investors saving for retirement this year as it examines investment advisers and brokers, the agency said in its annual priority list.
The regulator will explore risks associated with increasingly popular alternative investments designed to generate high yields amid low interest rates “as investors are more dependent than ever on their own investments for retirement,” the letter states.
The emphasis on retirement savings comes as droves of baby boomers exit the workforce with nest eggs built in 401(k) plans and individual retirement accounts. The SEC’s focus on this group helps to illustrate the activities it is targeting, such as reverse churning, sales practices, suitability determinations and the use of alternative and fixed-income investments.
“No one can argue with protecting retirees,” said Todd Cipperman, principal at Cipperman Compliance Services. “It’s the mom-and-apple pie of regulation.”
This year’s priority letter – at four-and-a-half pages – is less than half the size of last year’s letter. It is designed to warn advisers what to expect on exams.
“The SEC is focusing more on what is truly a new priority, what they put ahead of other areas,” said Daniel Bernstein, director of research and development at MarketCounsel, a compliance consulting firm.
In addition to retirement savers, the letter highlights the themes of market-wide risk and the use of data analytics to target illegal activity.
Topics that don’t appear in this year’s list include custody, conflicts of interest, and marketing and communication, among others.
As it did last year, the SEC is targeting investment advisers who are dually registered as brokers and have the ability to address clients either as an adviser charging a fee on assets or as a broker charging commissions on trades. The agency doesn’t want investors paying a fee in a wrap account when the adviser is doing little trading on their behalf.
“Where an adviser offers a variety of fee arrangements, we will focus on recommendations of account types and whether they are in the best interest of the client at the inception of the arrangement and thereafter, including fees charged, services provided and disclosures made about such relationships,” the letter states.
Another SEC priority is protecting investors when they make decisions on what to do with money in a company retirement account when they leave their employer.
“We will assess whether registrants are using improper or misleading practices when recommending the movement of retirement assets from employer-sponsored defined contribution plans into other investment and accounts, especially when they pose greater risks and/or charge higher fees,” the letter states.
The SEC is trying to stop advisers who have only their own bottom line in mind on rollovers.
“They’re focusing on reps that are selling whether [or not] it’s in a client’s best interest or is suitable,” Mr. Bernstein said.
Elsewhere in the letter, the SEC said that it would continue to utilize “significant enhancements in data analytics” to identify advisers “with a track record of misconduct and examine firms that employ them.”
In a conference call with reporters, Andrew Bowden, director of the SEC Office of Compliance Inspections and Examinations, said a new effort in 2015 will be to examine registered investment companies that have never been examined before.
The initiative targets about 100 fund complexes created before 2014. The SEC will try to exam about 25 “within a reasonable period,” Mr. Bowden said. “Early summer is when we’ll get out and begin those [exams].”
This year, the SEC also is reviewing the supervision of branch offices. Mr. Bowden said the agency will use data analytics to determine which problems to target. For example, sales data on structured products collected at the home office could indicate the “magnitude and velocity” of sales in branches.
“It can be driven by individuals or the particular activity in that branch,” Mr. Bowden said.
The SEC notes that the unusually short and easy-to-read letter “is not exhaustive.”
Financial advisers should be prepared for more topics if they are examined.
“As my social studies teacher used to say, ‘The test will include the whole chapter,’ ” Mr. Cipperman said.
From: Investment News, January 2015