The headquarters of the United States Securities and Exchange Commission (SEC).
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The Securities and Exchange Commission will investigate with more force this year’s conflicts of interest in financial advice, at a time when market conditions could cause brokers to take advantage of clients more often, the federal agency said Wednesday.
The financial regulator will prioritize fraud, sales practices and conflicts between financial advisers and brokers, the SEC said in its annual list of investigation priorities, outlining its 2021 oversight agenda for such companies.
Its main purpose is to provide protection against conflicts that harm seniors and pension savers.
“Recent market volatility and industry pressures have impacted fees and other revenues collected by businesses,” the agency wrote. “These conditions can lead to more financial stress for companies and their staff, which in turn can lead to more instances of fraudulent behavior.”
Rollovers and account types
Financial conflicts of interest can take many forms.
For example, a broker may try to sell a mutual fund or annuity with a higher commission than another comparable investment, but which may not be the most suitable for the client.
The SEC will focus on recommendations to clients in areas such as account type – for example, an account with commissions versus fixed annual fees – and rollovers, from a 401 (k) plan to an individual retirement account.
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It will also examine companies’ selling practices for different types of investments, such as structured products, exchange-traded funds, real estate mutual funds, private placements, annuities, digital assets, municipal and other bonds and microcap securities, the agency said.
In addition, it will examine brokerage firms to assess their compliance with standards related to providing access to complex strategies, such as options trading.
Regulation best interest
Real estate agents have long operated on a different legal playing field than financial advisers.
Financial advisers have a fiduciary duty to provide advice that is in the client’s best interests, while brokers have a less stringent obligation.
(Although, perhaps counterintuitively, some brokers can legally call themselves “advisors.” And many can choose when to operate like one or the other.)
The SEC issued a rule – Regulation Best Interest – in 2019 to mitigate such conflicts of interest in financial advice.
While it has prompted many brokerage firms to change their behavior (for example, by disallowing the sale of certain investments), investor advocates believe it still allows brokers to provide conflicting advice to clients.
The SEC will also focus its investigations on regulatory compliance by brokerage firms known as Reg BI. Previous exams focused on processes companies used to apply the rule; In 2021, the SEC will expand the scope of its investigation, the agency said.
The number of SEC supervised consulting firms has grown significantly in recent years – to nearly 14,000, up from 12,000 five years ago. At the same time, customer assets grew by about $ 30 trillion to $ 97 trillion.
The SEC completed approximately 2,950 investigations of financial advisory firms last year, a 4% drop from 2019 that is largely due to the impact of the Covid pandemic, he said.
Conflicts of interest were among the top investigative priorities for the SEC this year. The agency also focuses on other issues such as climate risks, information security, financial technology and anti-money laundering.