The headquarters of the US Securities and Exchange Commission (SEC).
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The Federal Agency said on Wednesday that the Securities and Exchange Commission will examine stakeholders in financial advice with greater vigor this year, at a time when market conditions could lead brokers to take more frequent advantage of clients.
The financial regulator will prioritize fraud, sales practices and conflict between financial advisers and brokers, the SEC said in its annual list of exam priorities, setting out its 2021 oversight agenda for such businesses.
It aims in particular to guard against conflict that harms the elderly and retirement savers.
“Recent market volatility and pressure in the industry have affected fees and other revenue collected by companies,” the agency wrote. “These conditions can cause increased financial strain on businesses and their staff, which in turn can lead to increasing cases of fraudulent conduct.”
Transfers 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 similar investment, but which may not be best for the client.
The SEC will focus on recommendations to clients in areas such as the type of account – for example, an account with commissions versus fixed annual fees – and repayments, from a 401 (k) plan to an individual retirement account.
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The agency also investigated the sales practices of enterprises for various types of investments, such as structured products, exchange traded funds, real estate investment funds, private placements, annuities, digital assets, municipal and other securities, and microcapitalisations.
In addition, it will examine brokerage firms to determine if they meet standards regarding retail investors’ access to complex strategies such as options.
Regulation Best interests
Brokers have long been working on a different legal playing field than financial advisors.
Financial advisers have a fiduciary duty to provide advice that is in the best interests of a client, while brokers have a less stringent obligation.
(Although some brokers may legally call themselves ‘advisers’, although, perhaps contradictory, many may choose when to act as one or the other.)
The SEC issued a rule in 2019 – Regulation Best Interest – to reduce such conflicts of interest in financial advice.
Although this has led many brokerage firms to change their behavior (for example, by banning the sale of certain investments), investors believe that it still enables brokers to give conflicting advice to clients.
The SEC will also focus its investigation on compliance of brokerage firms with the regulation, known as Reg BI. Preliminary examinations focused on processes that businesses used to implement the rule; in 2021, the SEC will expand the scope of its investigation, the agency said.
The number of advisory firms overseen by the SEC has grown significantly in recent years – to nearly 14,000, up from 12,000 five years ago. At the same time, the assets of clients grew by about $ 30 billion to $ 97 billion.
The SEC completed about 2,950 investigations into financial advisory firms last year, a decrease of 4% over 2019, which can be attributed mainly to the impact of the Covid pandemic.
Conflicts of interest are the main exam priorities for the SEC this year. The agency also focuses on other issues such as climate risk, information security, financial technology and anti-money laundering.