Fees, Rollovers Still SEC Exam Priorities for 2015

“The SEC’s letter is definitely shorter this year,” says Daniel Bernstein, chief regulatory counsel at MarketCounsel, a business, regulatory, and compliance consulting firm for investment advisers. One reason for the shorter letter, Bernstein tells PLANADVISER, is that the priorities related to self-regulatory organizations (SROs) were removed, to be addressed separately. Second, each issue was streamlined and given less detail in the important annual document.

The entire document for 2015 is five pages, down from 2014’s 10 pages, which in turn was shorter than the 13 pages the SEC turned out for 2013. Also, there are far fewer footnotes than in last year’s letter. 

“Also interesting,” Bernstein says, “there seem to be a few priorities that get dropped year to year.” For instance, this year, asset custody is not on the list of exam priorities, Bernstein notes, perhaps because it almost goes without saying that advisers should be ensuring the safety of their clients’ assets. “If you’re going through an examination, the first thing they’ll look to see is if you have custody. They’re trying to show their new current priorities. It doesn’t mean other things aren’t important, but they lose impact if they keep showing the same priorities year after year.”

The priorities are issued by the Office of Compliance Inspections and Examinations (OCIE), a division of the SEC that the commission calls its eyes and ears. OCIE conducts examinations of registered entities to promote compliance, prevent fraud, identify risk and inform policy.

This year’s priorities focus on issues that involve investment advisers, broker/dealers and transfer agents in three thematic areas. These include i) examining matters of importance to retail investors and those investors saving for retirement; ii) assessing issues related to market-wide risks; and iii) analyzing data to identify and examine registrants that may be engaging in illegal activity, such as excessive trading or penny stock pump-and-dump schemes, among many other possibilities.

The SEC outlined concerns about investors and the complex and evolving options they confront when determining how to invest their money, including retirement funds. “Registrants are developing and offering to [retail and retirement] investors a variety of new products and services that were formerly characterized as alternative or institutional,” the priorities letter states, “including private funds, illiquid investments and structured products intended to generate higher yields in a low-interest rate environment.”

Sales Practices

Several exam initiatives will assess risks to investors that can arise from these trends, including fee selection and reverse churning; sales practices; suitability; branch offices; alternative investment companies; and fixed-income investment companies.

“The SEC expects to continue to assess whether registrants—mainly broker/dealers—are using improper or misleading practices for moving assets,” Bernstein says. Of particular interest to the commission are registered reps using misleading tactics for rollovers. “Someone meets with someone approaching retirement, and sits down to convince them they should roll their account over from an employer-sponsored plan,” he explains.

The adviser or broker/dealer who recommends a transfer of plan assets needs to be very careful to ensure they’re acting in the best interests of the investor, Bernstein cautions, especially if they are recommending any investments that carry higher costs or are high risk.

Advisers or broker/dealers need to remember that there is no blanket answer for every situation, Bernstein notes, and that advisers must always keep top of mind their fiduciary responsibility to meet the best interests of a particular client.

Another priority is supervision of branch offices. “There will be more scrutiny on making sure they are properly supervised,” Bernstein says. “Whether they’re five miles away or 500, they’re not out of sight, out of mind.” The reason is that supervision is not always as strong when representatives are located in different offices, he says, and the SEC has determined this as a risk.

Bernstein’s advice: “Remember that branch offices are part of your firm,” he says. “Some might think they are semi-autonomous, but they are one firm. They need to ensure that the same culture of compliance, the same training—if not more—and the same resources are available, regardless of whether it’s at the home office or a branch office.”

The streamlined priorities and sparse detail (compared with previous years) shouldn’t make SEC registrants feel that any priorities are being given short shrift, or that these are new areas of scrutiny, Bernstein says. “Nothing should be new to advisers,” he say. “The SEC is not trying to make law with this letter, and advisers should just make sure they’re in compliance with these areas.”

“The description of OCIE priorities is not exhaustive,” the SEC says, emphasizing that “significant resources” will be allocated throughout 2015 to the examination issues outlined as well as to risks, issues and policy matters that arise from market developments, new information and coordination with other regulators.

More information about the SEC’s exam priorities for 2015 is here.