The examinations office of the Securities and Exchange Commission (SEC) is putting retirement savings on the front burner for 2015.
In its annual priority list for examinations, the SEC Office of Office of Compliance Inspections and Examinations (OCIE) named matters “of importance to retail investors and investors saving for retirement” as its top priority for exams of registered investment advisors (RIAs).
OCIE’s scrutiny in this area will include “whether the information, advice, products and services being offered is consistent with applicable laws, rules and regulations.”
The office named other priorities too. For example, “assessing issues related to market-wide risk” was second on the 2015 priority list, and identification and examination of registrants “that may be engaged in illegal activity” was third.
The first priority
But it is the first priority — retail retirement matters — that may draw the attention of RIAs and those who work with them. That is because retirement products and plans represent a growing portion of RIA business.
OCIE indicated that the registered entities it examines include RIAs, investment companies, broker/dealers, clearing agencies, municipal advisors, transfer agents, exchanges and self-regulatory organizations. (Priorities for exams of the last two appear in another document.)
Insurance and financial professionals who do not come under this purview may want to stay abreast of issues the OCIE is spotlighting anyhow. That is because federal and state regulators do communicate with one another on matters of mutual interest and concern, so regulatory thinking spreads.
In general, the SEC office noted that it is planning various examination initiatives to assess risks to retail investors that can arise from recent retirement trends such as:
- Offers to retail investors of new products and services that were formerly characterized as alternative or institutional. Examples include private funds, illiquid investments, and structured products intended to generate higher yields in a low-interest rate environment.
- Offers to retail investors of information, advice, products, and services that help them plan for, and live in, the retirement years. The OCIE identified these offers as coming from the “financial services industry,” but does not indicate any particular wing of the industry.
As for specific areas of retirement focus, the office lists six “trends” it is watching. These are: Fee selection and reverse churning, sales practices, suitability, branch offices, alternative investment companies, and fixed income investment companies. The first three are of particular interest to insurance and financial advisors.
“Financial professionals serving retail investors are increasingly choosing to operate as an investment advisor or as a dually registered investment advisor/broker-dealer, rather than solely as a broker-dealer,” OCIE said. The fee structures for these advisors can vary from fees based on assets under management, hourly fees, performance-based fees, wrap fees and unified fees, it said.
So, when an advisor offers a variety of structures, “we will focus on recommendations of account types and whether they are in the best interest of the client at the inception of the arrangement and thereafter,” OCIE said.
This focus will include “fees charged, services provided and disclosures made about such relationships.”
The fee structures used at the retail level have been a matter of growing interest and concern to the SEC. In December, the SEC’s Office of Investor Education and Advocacy issued an “Investor Bulletin” alerting investors to the “miscellaneous fees” that some brokers have been charging.
These can range from postage and handling charges, administrative service fees, clearing and transfer fees, execution facility fees, and others. “It is a good idea to pay attention not only to the commissions your broker charges, but to other fees as well.” the bulletin said.
Ten months earlier, in February, the same office issued an “Investor Bulletin” on how fees and expenses affect investment portfolios. The document urged investors to “look at your account opening documents, account statements, confirmations and any product-specific documents to see the types and amount of fees you are paying. Fees impact your investment, so it’s important you understand them.”
The February bulletin gives examples of transaction and ongoing fees to check out. “Transaction fees” include commissions, markups, sales loads, surrender charges, it said. “Ongoing fees” include investment advisory fees, annual operating expenses, 401(k) fees, and annual variable annuity fees.
These bulletins gain context from remarks that OCIE Director Andrew J. Bowden made in a speech he gave last March. He said his office has been looking at “the trend among dually registered firms to move their clients’ assets from commission-based brokerage accounts to fee-based wrap accounts that offer advice and no-commission trading for one bundled asset-based fee.”
The move into fee-based wrap accounts has become “a widespread practice,” he told the Investment Adviser Association Compliance Conference in Arlington, Va., according to published remarks appearing on the SEC website.
“A lot of people have jumped into the pool. We fear that the rationalization that ‘everyone is doing it’ may be adversely affecting people’s thinking about how some of these arrangements are in the best interest of their clients.”
The stakes for investors and advisors are high, he added. So is “the risk that the gold coins are clouding their vision.”
Concerning sales practices in the retirement area, the OCIE’s priority list says the SEC office will be assessing whether registrants are using “improper or misleading practices” in rollovers. Specifically, the focus will be on practices “when recommending the movement of retirement assets from employer-sponsored defined contribution plans into other investments and accounts, especially when they pose greater risks and/or charge higher fees.”
Here, the OCIE plans to will evaluate registered entities’ recommendations or determinations to invest retirement assets into complex or structured products and higher yield securities. This will include “whether the due diligence conducted, the disclosures made and the suitability of the recommendations or determinations are consistent with existing legal requirements.”
The focus is on the retail level
The three “trend” areas mentioned previously, and the three others (branch offices, alternative investment companies and fixed income investment companies) involve retirement matters at the retail investor level in some fashion.
By way of comparison, in 2014, OCIE named “fraud detection and prevention” as its top priority. Retirement-related matters did show up on OCIE’s exam priority list last year, but they ranked in sixth place. The retirement focus then was on “retirement vehicles and rollovers.” For example, the office said it would examine “the sales practices of investment advisors targeting retirement-age workers to roll over their employer-sponsored 401(k) plan into higher cost investments.”
How the heightened focus on retirement in 2015 will impact the retail retirement marketplace remains to be seen. But the fact that the subject is now at the top of the OCIE exam priority list suggests the industry will heighten its own focus too.
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