SEC officials tell advisers to put clients’ interests first, tell truth in ads

SEC officials emphasized Tuesday the basics for complying with investment advice regulations and the new marketing rule — put clients’ interests first and don’t mislead them when touting your firm.

The Securities and Exchange Commission’s virtual Investment Adviser/Investment Company National Compliance Seminar featured SEC staff providing direction for the audience of compliance professionals on how to ensure that their firms stay aligned with agency rules, including Regulation Best Interest, the broker-dealer standard of conduct, the fiduciary standard for investment advisers and the advertising rule, which went into force on Nov. 4.

SEC Chairman Gary Gensler urged the audience to be “good counsellors” at their firms by helping their colleagues adhere to securities regulations, using the investment advice rules as an example.

“At the heart of Reg BI and the IA fiduciary standard is something my mom, Jane Gensler (who, by the way, was a really ‘good counsellor’), would have said: You have to put your client’s interests first,” Gensler said via video.

Financial advisers must not let their own interests affect the advice they give or the recommendations they make, he said.

“If advisers can’t do that, they have decisions to make: Eliminate the conflict, don’t give the advice, or find some other way to ensure that they don’t put their interests ahead of the investor’s interests,” Gensler said.

The SEC is concentrating its examinations for Reg BI compliance in several areas, Richard Best, director of the SEC Examinations Division, said during the seminar. They include probing whether brokers consider reasonably available alternatives when they make recommendations; how they manage conflicts of interest, especially those related to financial incentives; how they conduct trading and ensure best execution; and how they make decisions on account selection and conversion.

One of the priority areas for examinations of investment advisers is revenue sharing and share-class selection for mutual funds they recommend. The SEC has been cracking down for several years on inadequate disclosure of 12b-1 fees and other payments from funds to advisers.

“Believe it or not, despite the large amount of press [coverage] and enforcement actions, we still see issues in that area,” Best said.

The SEC also is zeroing in on recommendations to change account types, especially in circumstances where a client or customer appears to be moving from a zero- or low-commission account type into a wrap-fee arrangement, Best said.

“The question will be, is the recommendation in the best interests of that particular investor?” he said.

The sweeping marketing regulation overhauls adverting rules for investment advisers for the first time since the early 1960s. The measure went into force on Nov. 4, and many advisers are still struggling to get their arms around it.

Under the regulation, advisers are allowed to use client testimonials and third-party endorsements, as well as past-performance illustrations. But the latitude in promoting their businesses is wrapped in a 430-page regulation full of restrictions and prohibitions.

“At the core, this rule is about truth in advertising,” Gensler said.

The key is to substantiate claims with documentation, Christopher Mulligan, a senior adviser in the SEC Division of Examinations, said during the seminar.

“You need to make sure those statements are accurate,” Mulligan said.

Initially, the SEC will look at whether advisers have changed their policies and procedures to reflect the regulation that is now in place.

“In these early stages, we want to make sure you have the processes to comply with the marketing rule going forward,” Mulligan said.

But when it comes down to the nitty-gritty of how the rule will be examined and enforced, there are still many questions lingering. The SEC staff said that much of its compliance evaluation will come down to an assessment of facts and circumstances.