When SEC inspectors drop in on a firm this year, advisors serving retail clients had better be able to justify their fees, compensation and use of digital advice.
The SEC's Office of Compliance Inspections and Examinations published its sixth annual exam priorities, a document that puts the industry on notice about the regulator’s areas of concern
"This year, we will continue to prioritize protecting retail investors, particularly seniors and those saving for retirement, and pursue examinations of firms that provide products and services directly to them," the 2018 exam priorities letter states.
"Every dollar an investor pays in fees and expenses is a dollar not invested for his or her benefit," OCIE continues. "Therefore, the proper disclosure and calculation of fees, expenses, and other charges investors pay is critically important."
OCIE says that its examiners will be looking closely at how advisors calculate fees and expenses, matching what service agreements with how clients are charged.
"OCIE is fairly transparent. Now that the staff has identified these issues, compli-pros should expect a heavy focus during examinations," Cipperman Compliance Services says in a release. "Compliance departments should review policies and procedures and testing to get ready."
Additionally, OCIE says it will scrutinize areas where firms might expose clients to the risk of excessive fees through practices such as selling higher-cost mutual fund share classes or failing to reassign an account after a registered representative leaves the firm.
On digital advice, OCIE says its examiners will continue to evaluate firms offering robo advisors or those that "interact primarily with clients online." Of particular interest: algorithms that generate recommendations, marketing materials, investor data and disclosure of conflicts of interest.
SEC Chairman Jay Clayton has emphasized retail investor protections as a top priority at the commission, sometimes referring to "Mr. and Mrs. 401(k)" in public comments.
OCIE Director Peter Driscoll said in a statement the regulator’s risk-based approach will continue to review both new registrants and established advisors who haven’t previously been examined. Advisors with practices that raise flags with the SEC's increasingly technology-driven market surveillance program can also expect scrutiny, OCIE says.
Examiners will also scrutinize how firms are dealing with cryptocurrencies and initial coin offerings. Cybersecurity and anti-money laundering programs are also within OCIE’s sights.
Duane Thompson, senior policy analyst at Fi360, a fiduciary education, training and technology company, notes that many items in the SEC's exam priorities are similar to last year. However, OCIE has identified some new specific products as areas of focus, he says.
"In terms of combining new and old priorities, I found it interesting that OCIE plans to take a closer look at the use of target-date funds in retirement portfolios," Thompson writes in an email. " OCIE is expanding its focus on retirement portfolios to include public employee plans."
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