The Securities and Exchange Commission is cracking down on dually registered advisors’ use of more costly money markets and cash sweep arrangements when less expensive products are available, a top SEC enforcement official said yesterday.

“The more we look, the more undisclosed or inadequately disclosed financial conflicts we find,” said Stephanie Avakian, co-director of the SEC’s Division of Enforcement, speaking to advisory firm executives at a London conference.

Since interest started to rise in 2016, sweep money market accounts that pay far less than other money market funds have been a huge source of profits for broker-dealers, banks and custodians. At some BD's, sweep accounts could be generating more than 25 percent of profits. Many fiduciary advisors view them as suitable only as a place to park very short-term cash.

In some cases, SEC examiners are finding that dually registered advisors and brokers are making more than investors on the money markets they recommend because of the incentives advisors are paid and the higher costs that are passed on to investors, Avakian added.

When it comes to cash sweep arrangements, “in some cases, the revenue received by the advisor or the advisor’s affiliate far exceeds the interest earned by the client on its cash,” Avakian said.

“In fact, in some cases, these arrangements may actually lower the interest paid to the client,” she added.

Cash sweep accounts are advisory accounts where uninvested funds are automatically swept into a money market mutual fund or a bank deposit. The problem comes in when the bank offering the sweep account charges more for the account and/or pays less in interest to investors in order to pay advisory firms a portion of the revenue the bank earns on the investor’s deposits. A portion of that revenue is then passed on to the dually registered investment advisor or broker-dealer to incent him or her to choose these accounts.

Avakian noted that a dually registered advisor or an advisor with an affiliated broker-dealer may have a financial interest, a conflict, in recommending one cash investment over another. For example, some money market mutual funds carry 12b-1 fees or make revenue-sharing payments, while other money market funds do not carry those fees.

“Advisors recommending or choosing between different money market funds must make full and fair disclosure of these types of conflicts to their clients,” Avakian told advisors.

The SEC is “actively looking for circumstances where an advisor is financially conflicted by incentives that could affect investment recommendations to clients,” she added.

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