Advisors and brokers may be charging excessive fees, offering conflicted advice and even engaging in fraud to make up for revenue lost during the Covid shutdown, according to a new, wide-ranging risk alert the Securities and Exchange Commission issued for both the industry and investors.

The Office of Compliance, Inspections and Examinations (OCIE) said it has identified a number of alarming risks 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.” 

The recent market volatility and the resulting impact on investor assets and fees “may have increased financial pressures on firms and their personnel to compensate for lost revenue. While these incentives and related risks always exist, the current situation may have increased the potential for misconduct,” the SEC said.

Amongst the most egregious fee and expense violations that OCIE examiners are seeing are:

  • 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.

SEC examiners also used the risk alert to spell out a variety of financial conflicts of interest they are seeing advisors engage including questionable rollover recommendations, transfers to advised accounts and investments in products that pay the firm or advisor more.

Red flags include instances where advisors are “making recommendations that result in higher costs to investors and that generate greater compensation for supervised persons, such as investments with termination fees that are switched for new investments with high up-front charges or mutual funds with higher cost share classes when lower cost share classes are available,” the agency said.

Examiners also reported they have seen instances where advisors are taking loans from investors and clients.

The SEC made clear in the alert that COVID will not provide cover for firms and advisors who are engaging in or failing to supervise any practices that result in investors being overcharged or defrauded.

OCIE examiners also said they are seeing instances of advisors “making securities recommendations in market sectors that have experienced greater volatility or may have heightened risks for fraud” and said it expects firms to ramp up supervision now that most employees and advisors work from home virtually.

Overall the agency used the alert to make clear that the challenges of a pandemic-induced virtual workplace will not be a good defense against compliance failures and urged firms to modify their practices to address:

  • Supervisors not having the same level of oversight and interaction with supervised persons when they are working remotely;
  • Supervised persons making securities recommendations in market sectors that have experienced greater volatility or may have heightened risks for fraud;
  • The impact of limited on-site due diligence reviews and other resource constraints associated with reviewing of third-party managers, investments, and portfolio holding companies;
  • Communications or transactions occurring outside of the Firms’ systems due to personnel working from remote locations and using personal devices.

Many issues—such as firms’ not picking up client checks in the mail in a timely fashion—have been exacerbated by the new virtual, remote workplace, the SEC said.

“Firms may want to…consider disclosing to investors that checks or assets mailed to the firm’s office may experience delays in processing until personnel are able to access the mail or deliveries at that office location,” the SEC said.

To cut down on fraud and impersonation, the agency also recommended that firms collect a trusted contact person for each investor “particularly for seniors and other vulnerable investors,” the agency said.