Conflicts of interest on SEC’s radar

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.”

Related Topics: Pershing LLC