SEC exam priorities target fee disclosures to retail investors

Agency also to take close look at Finra, cybersecurity and market structure

Feb 7, 2018 @ 10:48 am

By Mark Schoeff Jr.

Now would be a good time for investment advisers to review the fees they're charging clients and how they're telling clients about them.

In its 2018 exam priorities list released Wednesday, the Securities and Exchange Commission said it will target potential investor harm that arises from financial advisers charging excessive fees and failing to disclose them.

"If I were a registered investment adviser today ... I would go back and look at all my disclosures for consistency and accuracy," said Amy Lynch, president of FrontLine Compliance.

She recommends advisers go through each account; take note of the management fees, revenue sharing and other charges; and see if they're fully explained.

A focus on fees and disclosures is a staple of SEC exam priority letters, but this year there is a special emphasis right at the top.

"This year, we will continue to prioritize our commitment to protect retail investors, including seniors and those saving for retirement," the SEC Office of Compliance Inspections and Examinations wrote. "We will be especially looking closely at products and services offered to retail investors, as well as the disclosures they receive about those investments."

How fees are determined and disclosed will be at the heart of examinations.

"Examiners will review, among other things, whether fees and expenses are calculated and charged in accordance with the disclosures provided to investors," the priorities document states. "Examiners will also review fees charged to advisory accounts, particularly where the fee is dependent on the value of the account, to assess whether assets are valued in accordance with investor agreements, disclosures, and the firm's policies and procedures."

Todd Cipperman, principal at Cipperman Compliance Services, said a straightforward way for advisers to avoid trouble with the SEC is to streamline their revenue.

"We've been telling our clients: Be very careful if you're receiving compensation other than directly from advisory fees paid by the client," Mr. Cipperman said.

Last year's priority list contained many of the same objectives, but it ran only five pages. This year's list is 16 pages.

"It reads more like a mission statement than it does a typical priorities list," Ms. Lynch said.

The higher-gloss priority list is the first issued under SEC Chairman Jay Clayton, a former securities lawyer who was sworn in last May.

"Jay Clayton is seen as someone who is an industry-driven commissioner," said Mitchell Littman, partner at Littman Krooks. "But this is a statement showing he has equal concern for the investor community, particularly the retail investors and seniors."

In addition to retail investor protection, the SEC will zero in this year on the brokerage industry's self-regulator, the Financial Industry Regulatory Authority Inc.

"Our examinations of Finra will focus on Finra's operations and regulatory programs and the quality of Finra's examinations of broker-dealers and municipal advisors that are also registered as broker-dealers," the priorities document states.

Finra also was on last year's list.

"A lot of this has to do with questions raised by the industry about Finra's mission and its enforcement activities," Mr. Cipperman said.

Recently, the regulator has taken steps to be more transparent about its budget as part of its Finra 360 self-assessment initiative.

The SEC must approve Finra rules and has always overseen it. In 2016, the SEC's exam office established the Finra and Securities Industry Oversight office to beef up Finra supervision.

"We welcome this oversight by the SEC, as we believe it not only helps us further our investor protection and market integrity mission, but also provides valuable independent perspectives on our operations," Finra chief executive Robert W. Cook said in congressional testimony last year.

Another priority is cybersecurity.

"Our examinations have and will continue to focus on, among other things, governance and risk assessment, access rights and controls, data loss prevention, vendor management, training and incident response," the priorities document states.

Other priority areas include the Municipal Securities Regulatory Board, critical market infrastructure and anti-money-laundering programs.

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