SEC exams to focus on investor fees, adviser conflicts of interest in 2019

Agency intends to emphasize protection of Main Street investors

Dec 20, 2018 @ 5:20 pm

By Mark Schoeff Jr.

The Securities and Exchange Commission will target disclosures of fees and expenses to retail investors as well conflicts of interest in its 2019 examinations of investment advisers and brokers, the agency said Thursday.

The SEC's Office of Compliance Inspections and Examinations said in its annual examination priorities document that protection of ordinary investors, especially seniors and those saving for retirement, was paramount.

"Every dollar an investor pays in fees and expenses is a dollar not invested," the document said. "It is critically important that investors are provided with proper disclosures of the fees and expense they pay for products and services and that financial professionals accurately calculate and charge fees in accordance with these disclosures. For these examinations, OCIE will select firms with practices or business models that may create increased risks of inadequately disclosed fees, expense or other charges."

The SEC will zero in on advisers who recommend high-fee share classes as well as those who participate in wrap fee programs that combine advisory and brokerage services.

(More: Jay Clayton plans to crack down on retail fraud, promote IPOs)

Beyond retail investor protection, other themes of the SEC exam priorities are critical market infrastructure; the Financial Industry Regulatory Authority Inc. and the Municipal Securities Rulemaking Board; digital assets; cybersecurity and anti-money laundering.

"As these examination priorities show, OCIE will maintain its focus on critical market infrastructure and Main Street investors in 2019," SEC Chairman Jay Clayton said in a statement.

The document stresses that investment advisers must adhere to fiduciary duty and act in the best interests of their clients. The SEC will probe potential adviser conflicts, including the use of affiliated service providers and products, securities-backed and non-purpose loans and lines of credit and borrowing funds from clients. It also will review advisers' practices for portfolio management and making trading recommendations to clients.

The SEC will examine how investment advisers and broker-dealers interact with senior clients and those saving for retirement. There will be an emphasis on the ability of firms to identify senior financial exploitation.

(More:New tools to protect elderly from fraud, exploitation)

Risks associated with mutual funds and exchange traded funds also will be a priority for the SEC, with exams targeting index funds that track bespoke indexes and ETFs with little secondary market trading and other risk characteristics.

Another SEC priority will be to ensure that broker-dealers that hold customer funds safeguard and accurately report the assets.

In fiscal 2018, the SEC conducted 3,150 examinations, a 10% increase over fiscal 2017. It examined approximately 17% of registered investment advisers in fiscal 2018, compared to 15% in fiscal 2017. The SEC oversees approximately 13,200 investment advisers and, with Finra's help, 3,800 broker-dealers.


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