The SEC focuses on conflicts of curiosity in advising seniors
The headquarters of the US Securities and Exchange Commission (SEC).
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The Securities and Exchange Commission will be investigating conflicts of interest in financial advisory more deeply this year, at a time when market conditions can cause brokers to benefit from clients more often, the federal agency said on Wednesday.
The financial regulator will prioritize fraud, sales practices and disputes between financial advisors and brokers, the SEC said in its annual list of audit priorities setting out its oversight agenda for 2021 for such companies.
Above all, the aim is to protect against conflicts that harm seniors and retirees.
“Recent market volatility and industry pressures have impacted corporate fees and other income,” the agency wrote. “These conditions can lead to an increased financial burden on companies and their staff, which in turn can lead to increased cases of fraudulent behavior.”
Rollover and account types
Financial conflicts of interest can take many forms.
For example, a broker may attempt to sell a mutual fund or annuity with a higher commission than another similar asset, but it may not be best for the client.
The SEC will focus on recommendations to customers in areas such as account type – for example, an account that pays commissions versus flat annual fees – and rollovers from a 401 (k) plan to an individual retirement account.
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It also examines company sales practices for various types of investments such as structured products, exchange-traded funds, real estate mutual funds, private placements, annuities, digital assets, municipal and other bonds, and microcaps, the agency said.
It also examines brokerage firms to determine if they meet the standards to provide retail investors with access to complex strategies such as options trading.
Regulation best interest
For a long time, brokers have had different legal frameworks than financial advisors.
Financial advisors have a fiduciary duty to provide advice that is in the best interests of the client, while brokers have a less stringent obligation.
(Although some brokers may not intuitively refer to themselves as “advisers”. And many can choose when to act as one or the other.)
The SEC issued a regulation in 2019 – Regulation Best Interest – to reduce such conflicts of interest in financial advice.
While this has led many brokerage firms to change their behavior (for example, prohibiting the sale of certain investments), investor representatives believe it continues to allow brokers to provide conflicting advice to clients.
The SEC will also focus its investigations on brokerage firms’ compliance with the regulation known as Reg BI. Previous audits had focused on the processes companies use to enforce the rule. In 2021, the SEC will expand the scope of its review, the agency said.
The number of SEC-regulated advisory firms has grown significantly in recent years – from 12,000 five years ago to nearly 14,000. At the same time, customer assets rose by around $ 30 trillion to $ 97 trillion.
The SEC completed around 2,950 investigations into financial advisory firms last year. This represents a 4% decrease from 2019, largely due to the impact of the Covid pandemic.
Conflicts of interest were a top priority for the SEC this year. The agency also focuses on other topics such as climate risk, information security, financial technology and anti-money laundering.