SEC eyes movement of funds between brokerage, advisory accounts

Investment management unit chief says agency wants to be sure transitions are good for clients

By Mark Schoeff Jr.

Jan 30, 2014 @ 1:14 pm (Updated 4:32 pm) EST

SEC, securities and exchange commission, brokerage, advisory, investment management
Norm Champ, director of the SEC Division of Investment Management

The Securities and Exchange Commission has noticed a lot of client movement from brokerage accounts to advisory accounts in the investment advice business and is keeping its eye on whether the transition is good for clients, an SEC official said on Thursday.

Norm Champ, director of the SEC Division of Investment Management, said that the commission understands the business motivation behind the move — that a brokerage account doesn't generate much revenue if a client rarely trades, while an advisory account produces a regular fee — but said that he is concerned that it may hurt clients.

“Think carefully about where an adviser's fiduciary duty begins in that process,” he told hundreds of advisory firm and investment company officials at a national compliance seminar at the SEC's Washington headquarters.

The SEC explored its examination and compliance priorities at the event. One of the items at the top of its agenda this year is a focus on investment advisers who are dually registered as brokers and have the latitude to shift clients from one account type to another.

“If someone is encouraging people to move from brokerage accounts to advisory accounts, is that recommendation consistent with an adviser's fiduciary duty?” Mr. Champ said. “Are they, in fact, making that recommendation in the best interest of the client?”

There are 18,513 registered representatives who also maintain an independent registered investment adviser, according to Cerulli Associates Inc. Dually registered advisers manage $1.09 billion in assets.

One of the new topics on the SEC's exam priority list this year is wrap-fee programs.

The SEC is looking for potential conflicts of interest when a client is put into a wrap account, according to Jane Jarcho, national associate director of the SEC's Office of Compliance Inspections and Examinations.

The SEC doesn't want to see “reverse churning,” a situation in which clients are parked in a wrap account while financial advisers collect fees and do little or no work.

“We're looking to see if the [advisory] services are being provided, and if they're being monitored,” Ms. Jarcho said.

Another exam and enforcement focus for the SEC this year is custody of client assets. The topic, which was an exam priority last year as well, has come to the fore in the wake of the multibillion-dollar Ponzi scheme perpetrated by Bernard Madoff, who maintained control of his client's funds

Most advisers keep client assets with a third-party custodian. But the SEC released a risk alert last spring indicating many custody deficiencies in a sample of 140 exams.

Advisers were triggering custody in ways other than physically holding client funds.

“Investment advisers must comply with all aspects of the custody rule,” OCIE Director Andrew Bowden said.

Thursday's event was designed to facilitate communication about compliance between the SEC and advisory firms, SEC Chairman Mary Jo White said.

“We want to see firms foster an environment in which every individual at every level understands the importance of the compliance program and believes in the compliance culture,” she said. “We want to see if these firms actually walk the walk when it comes to the role of the compliance department.”