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SEC on compliance: Do what you say you're doing

Exam chief Jane Jarcho gives tips on what advisers can expect

Jan 16, 2014 @ 1:24 pm

By Mark Schoeff Jr.

Whether a topic is appearing on the Securities and Exchange Commission's examination priority list for the first time, such as wrap-fee programs, or is making an encore appearance, such as dually registered advisers, the agency is looking at the intersection between what is good for the adviser and what is good for the client.

“Conflicts of interest are the primary focus in a disclosure-based system,” Jane Jarcho, SEC national associate director of the investment adviser and investment company examination program, said this week in an interview. “As a fiduciary, you have to disclose any conflicts or potential conflicts.”

That theme runs throughout the list.

Here is Ms. Jarcho's take on some of the items.

Wrap-fee programs: The SEC will assess whether financial advisers are fulfilling fiduciary and contractual obligations to clients when using these vehicles. A particular concern is whether buy-and-hold clients are being put in wrap programs to generate higher fees for advisers.

“That is something that has the potential, if not monitored, not to be in the best interest of a client,” Ms. Jarcho said.

“The exam program is not in the business of telling firms what to do and how to do it,” she said. “But when they say what they're doing — and they say they're doing monitoring — they need to do it.”

Dually registered advisers: The growing popularity in the advice business of wearing two hats at once — investment adviser and broker — continues to attract SEC attention.

“We want to be on top of industry changes,” Ms. Jarcho said.

The SEC is homing on how advisers sort out clients as they conduct business in two different ways.

“A primary focus is on what type of account you're putting clients in and any sort of compensation arrangements that need to be disclosed,” Ms. Jarcho said.

“They have an obligation to consider what business model works best for their clients,” she said. “It's not about what business model makes them the most money.”

Mutual fund distribution fees: The SEC is continuing to probe payments from advisers and funds to distributors and other intermediaries to determine whether the fees are used to give certain funds preferential treatment in client recommendations.

The SEC began conducting sweep exams nearly a year ago to evaluate industry practices. The commission hasn't yet released the results.

“We're trying to see how distribution of funds is being paid for and what is the source of those funds,” Ms. Jarcho said.

Never-before-examined advisers: The SEC is targeting investment advisers who have been registered with the commission for more than three years but have yet to be examined.

The SEC will use a streamlined, risk-based examination method for 1,000 advisers who fit the definition.

“We believe there is real value in our examiners showing up and interacting with registrants and spending time looking at their records,” Ms. Jarcho said. “We don't have the resources to do a full-blown audit of everything, but we believe there's value in that exchange.”

When the SEC shows up at an adviser's door, he or she should be accommodating.

“Be ready to cooperate,” Ms. Jarcho said. “Show us your books, and records and answer our questions.”

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