The seat of the United States Securities and Exchange Commission (SEC).
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The Securities and Exchange Commission will investigate conflicts of interest in financial advisory this year more vigorously, at a time when market conditions may prompt brokers to take advantage of clients more often, the federal agency said on Wednesday.
The financial regulator will prioritize fraud, sales practices and conflicts between financial advisors and brokers, said the SEC in its annual list of examination priorities, which outlined its 2021 oversight agenda for these companies.
It will aim to protect especially against conflicts that harm the elderly and retirement savers.
“The recent market volatility and industry pressures have impacted the fees and other revenues charged by companies,” wrote the agency. “These conditions can cause greater financial stress for companies and their employees, which in turn can lead to an increase in cases of fraudulent conduct.”
Rollovers and account types
Financial conflicts of interest can take many forms.
A broker may, for example, try to sell a mutual fund or annuity with a higher commission than another similar investment, but which may not be the most suitable for the client.
The SEC will focus on recommendations for clients in areas such as account type – for example, an account that carries commissions versus fixed annual fees – and rollovers, from a 401 (k) plan to an individual retirement account.
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It will also examine companies’ sales practices for various types of investment, such as structured products, exchange-traded funds, real estate investment funds, private placements, annuities, digital assets, municipal bonds and others and microcap bonds, the agency said.
In addition, it will examine brokers to assess whether they are meeting standards relating to giving retail investors access to complex strategies, such as options trading.
Regulation’s best interest
Brokers have long been operating in a different legal playing field than financial advisers.
Financial advisors have a fiduciary duty to provide advice that serves the client’s best interests, while brokers have a less strict obligation.
(Although, perhaps against intuition, some brokers may legally call themselves “consultants.” And many can choose when they operate as one or the other.)
The SEC issued a rule – Best Interest Regulation – in 2019 to reduce these conflicts of interest in financial advisory.
While it has led many brokers to change their behavior (forbidding the sale of certain investments, for example), advocates for investors think it still allows brokers to give conflicting advice to clients.
The SEC will also focus its examinations on the brokerage firms’ compliance with the regulation, known as Reg BI. Previous exams focused on the processes that companies used to implement the rule; in 2021, the SEC will expand the scope of its scrutiny, the agency said.
The number of consultancy firms overseen by the SEC has grown significantly in recent years – to almost 14,000, up from 12,000 five years ago. At the same time, customer assets grew by about $ 30 trillion, to $ 97 trillion.
The SEC completed about 2,950 exams from financial advisory firms last year, a 4% drop from 2019, which can be largely attributed to the impact of the Covid pandemic.
Conflicts of interest are among the most important examination priorities for the SEC this year. The agency is also focusing on other issues, such as climate risk, information security, financial technology and combating money laundering.