The Securities and Exchange Commission will zero in on exchange traded funds and variable annuities in its examinations this year, adding those two categories to the priorities list it announced on Monday.
The SEC Office of Compliance Inspections and Examinations will delve into ETF sales strategies, trading practices and disclosures, paying particular attention to the extent to which client portfolios are invested in ETFs and the suitability of complex ETFs, such those that use leverage.
With variable annuities, the SEC will assess the suitability and supervision of sales, as well as disclosures that brokers provide to clients. Other new focus areas include examining liquidity — both of broker-dealers and fixed-income securities — and reviewing public pension advisers.
“These new areas of focus are extremely important to investors and financial institutions across the spectrum,” SEC Chairman Mary Jo White said in a statement. “Through information-sharing and conducting comprehensive examinations, OCIE continues to promote compliance with the federal securities laws to better protect investors and our markets.”
REVERSE CHURNING
Priorities that are appearing again this year in
the five-page letter include fee selection and reverse churning, cybersecurity, anti-money laundering, unregistered securities and investment advisers who have never been examined.
The overarching themes of the SEC examinations remained the same this year. They include protecting retail investors, with an
emphasis on the elderly, assessing market-wide risks and using technology to target violations.
“It's pretty clear that the SEC is concerned about the aging population of the country,” said Jay Gould, a partner at Winston & Strawn. “Suitability and best interests of the client take into account fee arrangement. [Investment advisers and brokers] need to be aware of that, particularly when dealing with older clients.”
One investment product that is popular among investors who are planning for their retirement is variable annuities. The SEC's focus on this area complements the
emphasis the Labor Department has put on the vehicles, which can provided guaranteed lifetime income but also come with high fees.
A trade association representing the retirement-income industry said that it welcomes the SEC's scrutiny.
“Our members are already focused every day on ensuring that variable annuity transactions are suitable through training programs and through supervision in the form of principal review of every transaction,” said Lee Covington, senior vice president and general counsel at the Insured Retirement Institute.
The group also is encouraging the SEC to release a prospectus summary for variable annuities.
“That will enhance disclosures and lead to fewer unsuitable practices,” Mr. Covington said.
Placing ETFs on the examination list is another step the agency is taking to monitor risks associated with the products. Over the summer, it gathered public comment about the products and on Christmas Eve released a report about their possible role in market gyrations on Aug. 24.
The SEC also is working on rules that address mutual fund and ETF liquidity and use of derivatives.
“Clearly, ETFs are fully in their sights,” said Dave Nadig, director of ETFs at FactSet Research Systems, a data and analytics firm. “It's the place where they've spent the most effort in 2015 across the SEC.”
The ETF market is growing quickly. The vehicles had inflows of $243 billion in 2015 compared to an outflow of $175 billion in traditional mutual funds, according to Mr. Nadig.
“Investors are voting with their feet,” Mr. Nadig said. “The SEC is trying to make sure they're on top of it.”
