Financial advisors and brokers are using just about every trick in the book to make up for revenues lost during the pandemic shutdown, including tactics that don't comply with the agency's rules, according to a risk alert the SEC published last week detailing its examiners’ findings that some
But if firms don’t want to feel the wrath of SEC, they would be well advised to look at the alert as a blueprint on how to follow to do the internal compliance work to avoid problems with the agency, Christine Lombardo, a partner in the law firm of Morgan Lewis, told Financial Advisor magazine.
SEC Office of Compliance, Inspections and Examinations (OCIE) examiners reported uncovering instances of advisors—many of them broker-dealer registered representatives—charging excessive fees, offering conflicted advice and even engaging in fraud during the Covid-19 shutdown, according to the alert.
“I expect that OCIE will certainly be looking into the issues identified in its risk alert as part of its examination program throughout the pandemic and as we emerge from this crisis,” Lombard said. “In that regard, it will be critical that firms assess their own businesses, procedures and potential vulnerabilities in light of the points raised by OCIE, including documenting that review and determinations or enhancements made as a result."
The SEC said it has identified a number of alarming advisor practices and noted that “market volatility related to Covid-19 may have heightened the risks of misconduct in various areas that the staff believe merit additional attention.”
According to the SEC, these are some of the most egregious fee and expense violations examiners are seeing:
• Advisory fee calculation errors, including valuation issues that result in over-billing of advisory fees.
• Inaccurate calculations of tiered fees, including failure to provide breakpoints and aggregate household accounts.
• Failures to refund prepaid fees for terminated accounts.
“Firms may wish to review their fees and expenses policies and procedures and consider enhancing their compliance monitoring, particularly by validating the accuracy of their disclosures and identifying transactions that resulted in high fees and expenses to investors, monitoring for such trends, and evaluating whether these transactions were in the best interest of investors,” the agency said.
How concerned are firms about the challenges of supervising advisors and reps remotely during the shutdown?
“We have worked with a number of firms on ways to enhance existing procedures to account for fully remote supervision. However, I will say that in my experience, the asset management industry was well-equipped to handle the sudden move to a remote working environment for a variety of reasons—most notably, that most firms already had the capability for employees to work remotely—both as standard practice, as well as through the firm’s business continuity procedures,” Lombardo said.