When it comes to compliance issues, the line between RIAs and broker-dealers seems to be getting fuzzier. At the beginning of the year, when the SEC and FINRA published letters detailing the issues of greatest concern for examiners, compliance experts noted a surprising similarity. And in laying out its examination priorities, the SEC’s Office of Compliance Inspections and Examinations broke with past practice and failed to distinguish between areas of concern specific to RIAs, broker-dealers and other regulated entities.

“The fact that they kind of jumbled everyone together in the same sandbox, at least excluding exchanges, was interesting in that they’re treating broker-dealers and advisors all of a piece,” says Glen Barrentine, a corporate partner at the law firm Winston & Strawn, where he chairs the broker-dealer regulatory practice. “It’s also very closely coordinated with FINRA’s priorities.”

Compliance experts are quick to note that the SEC’s annual examination letter is by no means comprehensive, and stress that when examiners visit a practice, their review will not be limited. Yet the priorities letter is the commission’s way of putting registrants on notice that they ignore the issues identified at their own peril.

“RIAs should look through this entire letter and really use this as a way of testing their compliance program,” says Brian Hamburger, CEO of MarketCounsel, a compliance consulting firm.

What issues are the regulators watching now? A close reading of the examination guidance from both the SEC and FINRA suggests that these five issues are now the top areas of concern.


The SEC begins its exam priorities with a warning about “protecting retail investors and investors saving for retirement,” and highlights as areas of concern the products advisors recommend and the sales practices they engage in when pitching retiring employees on rolling over their 401(k) plans.

FINRA similarly warns about rollovers and other “wealth events” involving the transfer of large sums of money.

In the rollover space, the SEC is concerned that advisors and brokers are engaging in “improper or misleading practices” to steer clients out of their employer-sponsored plans and into other investments that could carry higher fees and greater risks. The potential for a conflict in rolling over an employer plan arises when the advisors will pocket a commission or increase their management fees by goosing their AUM.

“Some people, their first thought is, ‘Oh, I’ve got a chance to move this over. I’ve got a chance to gain some AUM here.’ That can’t be the first thought,” says Jason Wainscott, chief compliance officer at OJM Group, an RIA headquartered in Cincinnati. “There’s really no reason to do it just to get it into your firm if it’s not in your clients’ best interest. I think the SEC is picking up on that.”

“Part of being a fiduciary is making sure that your client understands what they’re getting into — because if you don’t, it’s going to come back to haunt you,” says Wainscott.

Both the SEC and FINRA have noted investors’ increasing reliance on IRAs in planning for retirement. The commission also points out that advisors and brokers are presenting retail clients with a growing menu of complex investment products and advice, raising questions about the suitability of their recommendations.

“It’s not just broker-dealers — it’s registered investment advisors who have to be concerned about suitability as well, and these products are getting more and more complex,” says Jay Baris, chair of the investment management practice at the law firm Morrison & Foerster.

“I would tell [advisors]: First of all, make sure your disclosure to customers is state of the art and not misleading,” Baris continues. “No. 2, I would remind them that they’re fiduciaries, and if you’re a registered investment advisor you need to put your clients’ interests first.”

Some advisors, however, argue that the regulatory concerns may be misplaced. (So, for that matter, does Financial Planning columnist Bob Veres)

Craig Rollins, a partner at LJCooper Wealth Advisors in Orem, Utah, says his team helps clients roll over their 401(k) plans “all the time” — but that the conversation always starts with a review of the features of the old plan and an examination of what’s in the best interest of the client.

Too often, he argues, employers impose restrictions on 401(k)s for former employees, cutting off active management and making those plans a less attractive retirement vehicle than many other options. He worries that the heightened scrutiny from regulators could compel advisors to shy away from rolling over clients’ 401(k)s, even when that would be the best move for the client.

“Rollovers — for RIAs? Frankly, I’m a little bit baffled at why they’re tackling this at all,” Rollins says. “The problem in our industry has always been there are a few bad actors that create situations where the remainder of the industry who are trying to do it the right way are penalized.”

“There are a few bad actors that create situations where the remainder of the industry who are trying to do it the right way are penalized,” says Rollins.

Washington watchers note that there hasn’t been much enforcement activity against advisors working in the retirement space, but anticipate that that could soon change.

“I think that’s coming,” says Duane Thompson, senior policy analyst at fi360, a fiduciary training firm. “I think that is one of the areas that the SEC and FINRA are going to continue to look at, and I would guess that this year or next you are going to start seeing headlines.”


Amid a steady stream of headlines announcing the latest hack into one corporate network or another, it’s no surprise that financial regulators are growing more concerned about the industry’s cybersecurity defenses.

The SEC gave the issue only a passing reference in last year’s guidance, but the agency convened a cybersecurity roundtable soon after, and launched a sweep of exams focusing on the ways advisors and brokers were safeguarding systems and data.

Those exams will continue in 2015, and expand to include transfer agents, the commission says.

The SEC identifies cybersecurity as a “marketwide risk” in its 2015 exam priorities — and Hamburger cautions that advisors must treat the issue as much more than a check-box compliance exercise.

“This really should be important for advisors, not because of the regulatory issue. It’s almost embarrassing when the SEC comes in and finds cybersecurity violations,” Hamburger says.

“Advisors really should be paying attention because it’s good business,” he adds. “This is loss of confidence from your clients. This is a far greater currency that you’re trading with.”

Hamburger anticipates that the SEC could put forward a proposed rule or at least a concept release as it mulls how to strengthen the industry’s cybersecurity standards — although regulating or legislating in an area as fast-moving and technically complex as cybersecurity is inherently challenging.

And don’t expect that small RIA shops will get a pass, Hamburger says: “If they’re a big enough firm to collect sensitive data, they’re a big enough firm to protect it.”


Last year, the SEC issued a warning to advisors who were dually registered as RIAs and brokers, cautioning the industry to take care when placing clients in accounts where fees are assessed on commissions or as a percentage of AUM. Among the chief concerns was the fear that dual registrants would place an account that they knew would be traded lightly — if at all — in the advisory side of the practice simply to garner the management fee.

This “reverse churning” issue appears again in this year’s letter, though regulators also warn of the potential harms that can arise with all manner of other fee structures, including wrap fees, hourly fees and performance-based fees.

“Where an adviser offers a variety of fee arrangements, 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, including fees charged, services provided and disclosures made about such relationships,” OCIE says in its letter.

That issue is already very much on the radar at large independent B-Ds like Commonwealth, where Chief Compliance Officer Paul Tolley says his team reviews an automated feed that flags inactive accounts. With that information in hand, Tolley’s surveillance team might approach an advisor to inquire about the basis for the account placement and confirm that the client is, in fact, receiving additional planning or advice to warrant the management fee.

“This is a subject that we have looked at for years,” Tolley says. “We have long since had a report that identifies ... households in managed accounts where there is a period of inactivity. It’s not to say [an advisor should] trade for the sake of trading. It’s to say, you’ve got to be managing those clients, those accounts, those assets on an ongoing basis.”

With fees, as with complex products, compliance experts stress the importance of providing clients with full disclosures, and then generating a thorough record to document why the account type or investment vehicle is in the client’s best interest.

“What they’re saying is, you have to look at all the various fees you offer, and how you disclose those to your clients. Are there fees that are obviously better or worse for your clients within that structure?” Barrentine says. “You have a duty to make sure that either you put people in the fee structure that is in their best interest, or you make sure that if they’re making those decisions, they understand what the fee structures are.”

Wainscott says he presents advisors at his firm with a simple test when evaluating fee arrangements.

“If you can’t explain the fee structure to me in a way that I understand it right away, then I’m generally going to advise against getting anyone into it,” he says. “That’s part of being a fiduciary, is making sure that your client is comfortable and understands what they’re getting into — because if you don’t, it’s going to come back to haunt you.”


In a further hint at greater regulatory overlap for advisory and broker-dealer firms, the SEC is calling attention to issues arising with branch offices, raising the concern that registered representatives and advisor representatives could be out of step with the standards of conduct at the firm’s headquarters.

“You see a convergence of the regulatory concerns here,” Baris says. “What they’re looking for here is: Are there cowboys ... in the branch office?”

That issue is a concern at LJCooper, which has branches in Colorado and Florida. “You always run the risk when you’ve got people operating out of a branch, which is why a lot of our stuff is centralized,” says Rollins, who has helped put in place a consolidated operating structure.

Branch personnel have limited autonomy and are subject to periodic reviews, he says, and Rollins and other principals in the firm will occasionally drop in for a site visit.

“All of our approval processes run through the corporate office. We try to keep that very centralized so we know everyone’s operating on the same basis,” he says. “Always there’s the chance you could have a rogue operator, but that’s caught pretty quickly when you’re central as opposed to branch to branch.”

Commonwealth’s branch review team is bound by FINRA rules to examine its offices of supervisory jurisdiction at least once a year. Tolley says Commonwealth also makes a practice of visiting each of its RIAs at a minimum of once every three years, and typically more often than that.

He stresses the importance of site visits, though he also points out that a centralized oversight system and a well-staffed home office can help fill in the gaps.

“We are supervising through surveillance, through technology, transactions, communications every single day,” Tolley says. “We have just a myriad surveillance reports, exceptions reports that touch on a variety of issues.”


There’s one more clear message from both FINRA and the SEC this year: If you’re considering a recruit with repeated compliance violations, don’t expect that advisor to clean up his act for you.

In this year’s guidance memo, FINRA offers a blunt warning to the brokers it oversees: “Firms that hire or seek to hire high-risk brokers, including statutorily disqualified and recidivist brokers, can expect rigorous regulatory attention.”

The SEC also warns of recidivist representatives, saying that it will use their “analytic capabilities to identify individuals with a track record of misconduct and examine the firms that employ them.”

Both Wainscott and Rollins say they would be unlikely to hire any advisors with a blemish on their record — a hard line to be sure, but one that comes in consideration of the heightened regulatory scrutiny and reputational hit a rogue rep can bring to a firm.

“Our industry is rather unique,” Rollins says. “If you make a mistake, you can be blackballed very, very quickly, just because it goes on your record. And before we interview anybody, we will go in and look at your record.” 

Kenneth Corbin is a Financial Planning contributing writer based in Cambridge, Mass., and Washington, D.C.

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