SEC zeroes in on brokers with high rollover batting averages

Commission and Finra are concerned that brokers are steering investors into accounts that are more profitable to them than to the client.

Jan 28, 2014 @ 4:43 pm

By Mark Schoeff Jr.

Finra's Axelrod says: “The rollover issue is the key moment in someone's financial lifecycle; it's the critical moment.
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Finra's Axelrod says: “The rollover issue is the key moment in someone's financial lifecycle; it's the critical moment." (

If you're a broker who has a knack for successfully transferring client assets from company retirement plans to individual retirement accounts, you may attract unwanted attention from the Securities and Exchange Commission.

The SEC and the Financial Industry Regulatory Authority Inc. have made rollover reviews an examination priority for 2014. Both agencies are concerned that financial advisers may be encouraging rollovers to increase their own revenue rather than to help their clients enhance their nest eggs.

Check out a video interview with Dale Brown, where the Financial Services Institute Inc. president and CEO offers his Finra wish list.

“If someone has a really high batting percentage, that's when we want to dig in, perhaps talk to the clients and customers and figure out what conversations they're having, what are [clients] told, what really led [clients] to this decision,” Kevin Goodman, national associate director of the SEC broker-dealer examination program, told an audience at the FSI's OneVoice Broker-Dealer Conference in Washington on Tuesday.

Finra is reviewing the transparency, disclosure and assessment of client risk surrounding rollover decisions, according to Susan Axelrod, Finra's executive vice president for regulatory operations.

“The rollover issue is the key moment in someone's financial lifecycle; it's the critical moment,” Ms. Axelrod said at the conference. “So, it's appropriate for us to focus attention on it.”

She said that there's not an urgent problem with rollovers, but Finra is trying to “get a handle on how the industry is monitoring this activity.”

The topic has drawn the attention not only of the SEC and Finra but also the Labor Department, which is likely to address rollovers when it re-proposes its fiduciary-duty rule in August.

“This area is getting more attention than before, and I think that's quite positive,” Ms. Axelrod said.

Dually registered financial advisers who can operate as investment advisers or brokers are another exam priority for the SEC. When they wear their investment adviser hat, they must provide advice that's in a client's best interest. When they act as brokers, they meet a less stringent suitability standard governing sales of investment products.

The SEC is delving into how advisory firms make the decision to put clients into advisory accounts or brokerage accounts. The agency will assess the level of trading in the accounts and the amount of investment advice provided, among other factors.

“What we're really looking for are the outliers, which might be firms that are consistently guiding people to the wrong space in terms of what's in their best interest,” Mr. Goodman said.

The SEC also is studying how firms decide whether to practice as investment advisers or brokers. Mr. Goodman said that fiduciary duty is a high bar, but that broker regulation is more detailed and directive.

“I have a feeling that we're going to find there are some cases where the fiduciary duty scares firms off, but there are probably just as many cases where the prescriptive nature of broker-dealer rules scares people off,” Mr. Goodman said. “We want to understand where the bright lines are.”


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