The Securities and Exchange Commission will probe conflicts of interest in financial advice this year with more vigor, at a time when market conditions may lead brokers to take advantage of clients with greater frequency, the federal agency said Wednesday.
The financial regulator will prioritize fraud, sales practices and conflicts among financial advisors and brokers, the SEC said in its annual list of examination priorities, which outlined its 2021 oversight agenda for such firms.
It will aim to especially guard against conflicts that harm seniors and retirement savers.
“Recent market volatility and industry pressures have impacted fees and other revenues collected by firms,” the agency wrote. “These conditions may cause increased financial stress on firms and their personnel, which may, in turn, lead to increased instances of fraudulent conduct.”
Rollovers and account types
Financial conflicts of interest can take many forms.
A broker may, for example, try selling a mutual fund or annuity carrying a higher commission than another similar investment but which may not be best-suited for the customer.
The SEC will focus on recommendations to clients in areas like account type — for example, an account that carries commissions versus flat annual fees— and rollovers, as from a 401(k) plan to an individual retirement account.
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It will also scrutinize firms’ sales practices for various investment types like structured products, exchange-traded funds, real estate investment trusts, private placements, annuities, digital assets, municipal and other bonds, and microcap securities, the agency said.
Additionally, it will examine brokerage firms to assess if they’re meeting standards relative to giving retail investors access to complex strategies like options trading.
Regulation Best Interest
Brokers have long operated on a different legal playing field from financial advisors.
Financial advisors have a fiduciary duty to give advice that’s in a customer’s best interest, whereas brokers have a less-stringent obligation.
(Though, perhaps counterintuitively, some brokers can legally call themselves “advisors.” And many can choose when they operate as one or the other.)
The SEC issued a rule — Regulation Best Interest — in 2019 to reduce such conflicts of interest in financial advice.
While it’s led many brokerage firms to change their behavior (by disallowing the sale of certain investments, for example) investor advocates think it still allows brokers to give conflicted advice to clients.
The SEC will also focus its examinations on brokerage firms’ compliance with the regulation, known as Reg BI. Prior exams had focused on processes firms used to implement the rule; in 2021, the SEC will expand the scope of its scrutiny, the agency said.
The number of advisory firms overseen by the SEC has grown significantly in recent years — to almost 14,000, up from 12,000 five years ago. At the same time, client assets grew by about $30 trillion, to $97 trillion.
The SEC completed about 2,950 examinations of financial advisory firms last year, a 4% drop from 2019 that’s largely attributable to the impact of the Covid pandemic, it said.
Conflicts of interest ranked among the most important examination priorities for the SEC this year. The agency is also focusing on other issues like climate risk, information security, financial technology and anti-money laundering.
