Whether training its sights on advisors working for private funds or hybrid firms that target retirees, the SEC says it plans to zero in on whether registrants are serving the best interests of investors and charging fair compensation.
The exam strategy is based on findings of the SEC’s 3,040 exams in FY21, a 3% increase from FY20. Exam findings triggered 2,100 deficiency letters and 190 referrals to the Division of Enforcement, the SEC said in its newly released 2-22 examinations report.
“To date, our FY21 examinations prompted firms to return more than $45 [million] to investors. The [agency] also made more than 190 referrals of its examination findings to the Division of Enforcement. As we move further into FY22, we anticipate there will be more money returned to investors, and there will be additional referrals to enforcement resulting from our FY21 examinations,” the SEC said.
The regulator conducted 2,200 examinations of investment advisor firms that manage $110 trillion in 2021, or about 16% of the industry.
The SEC said its 2022 exam focus for advisors includes the following:
• Revenue sharing arrangements.
• Recommendations of more expensive classes of investment products when lower cost classes are available. One example is “RIAs that recommend no transaction fee mutual fund share classes that have 12b-1 fees in wrap fee accounts where the RIA may be responsible for paying transaction fees,” the agency said.
• Wrap fee recommendations, including best interest analysis, with an eye toward the impact the move to zero commissions is having on transactions.
• Recommendations of proprietary products that result in more or higher fees.
Advisor exams will also assess investor costs, the adequacy of policies and procedures to address conflicts, whether recommendations are in the best interest of clients and whether disclosures allow investors to provide informed consent, the SEC said.
“Dually registered RIAs and broker-dealers remain an area of interest for the division, as do affiliated firms with financial professionals who service both brokerage customers and advisory clients,” the SEC said.
The agency plans to emphasize the potential for conflicts of interest these firms present, especially in the arena of account recommendations and allocation of investments between brokerage and advisory accounts.
Exams of dually registered firms will look at the sale of high-fee products, including proprietary products and incentives and compensation structures “that inappropriately influence investment recommendations,” the agency said.