Conflicts of interest on SEC's radar

A consistent priority during Securities and Exchange Commission exams is looking at disclosure of conflicts of interest

Jun 8, 2018 @ 12:22 pm

By Bruce Kelly

Potential conflicts of interest, and the proper disclosure of those conflicts, should be among the priorities for RIA compliance programs right now.

Those potential conflicts at registered investment advisers include not disclosing fees charged to clients, trading arrangements with brokerage firms and loans to advisers from firms, according to two panelists speaking on Thursday in Orlando at Pershing's annual Insite conference.

A consistent priority for the Securities and Exchange Commission in exams is looking at disclosure of conflicts of interest, said Carrie O'Brien, senior special counsel for the SEC, during the panel, which was titled "Navigating the Evolving Regulatory Landscape for RIAs."

"I think disclosures are something the SEC is looking at," Ms. O'Brien said.

For example, an RIA will run into problems if its states on its form ADV that one fee is the highest advisory fee it charges, but during the SEC exam, the examiner discovers a client that is being charged a higher fee, she said.

In another example, Ms. O'Brien pointed to a recent SEC enforcement action and settlement with a firm for not disclosing conflicts of interest.

The RIA firm had an arrangement with outside advisers to move money to them for investment and they received a fee for that, Ms. O'Brien said. But that fee had not been disclosed to clients.

The firm had violations of the Investment Advisers Act for failing to disclose that conflict of interest. It also failed to have adequate policies and procedures around that conflict of interest, she said.

To avoid such conflicts, RIAs need to "think outside the box and make sure you know every drop of revenue that's coming into your firm and do that analysis," said Dan Bernstein, chief regulatory counsel for Market Counsel.

That includes the RIA's best execution of trades as well as advisers receiving and disclosing loans, he said.

During an SEC exam, RIAs simply can't say they use a major clearing or custodian firm like Pershing for the best execution of trades, he said. "It has to be more than that," he said. "You have to do a bit of an analysis."

For example, what if your RIA has an affiliation with a broker-dealer that requires you to utilize that broker-dealer for your advisory clients, Mr. Bernstein asked. That would be a "significant incentive" to continue to use that broker-dealer, he said. That should lead the RIA to best execution policies and disclosures.

Advisers may also run into problems if they do not disclose getting paid forgivable loans from a firm, Mr. Bernstein said. Such loans are common incentives when advisers move to a new employer. They can pose a conflict and "better be disclosed," he said.

"I think we have forgotten about some of this over the years because it's commonly perceived that everybody is doing it," he said. "But not everyone is."


What do you think?

View comments

Recommended for you

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Featured video


Financial advisers highlight solutions to increase diversity and inclusion

These Excellence in Diversity & Inclusion award winners suggest short-term changes to help foster D&I in the financial advice profession.

Latest news & opinion

7 things advisers should do today to boost diversity and inclusion

Creating diversity and inclusion within financial advice firms is challenging, but these InvestmentNews Excellence in Diversity & Inclusion award winners have suggestions that firms can put into practice today

The midterm elections: What's at stake for financial advisers

A shift in control of the House could change the course of important issues, including the SEC advice rule, tax reform and retirement policies.

What to tell your clients after they've won the lottery

The current combined Mega Millions and Powerball jackpots are more than $850 million. What should you tell your clients if they have a winning ticket?

2019 Medicare premiums announced

Slight increase in Part B premium to $135.50 per month is in line with expectations.

7 ways states got tough with unregistered individuals and firms in 2017

Rise in digital currency frauds helped trigger a crackdown by state regulators.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print