Under newly confirmed Chairman Jay Clayton, the SEC is setting its sights on expanded protections for retail investors, planning a series of RIA sweep exams exploring areas like robo advisors and money market funds.
Though Clayton is just a month into his new job, a position he entered with no prior government experience, some of his field lieutenants are already relaying the message that individual clients will be a major focus for the commission under his stewardship.
Clayton's recent call for public comments on a uniform fiduciary rule that would harmonize rules for advisors and broker-dealers is evidence of his intent, said Steven Levine, an associate regional director in the SEC's Chicago office, at an SEC compliance forum this week.
"From Chairman Clayton's first major public statement," Levine said, "it is clear that his focus is on retail, that he is deeply concerned about protecting retail investors."
DIGITAL ADVICE SCRUTINY
Slated to launch this year is an exam sweep looking at how firms are deploying robo advisors, or using automated services to augment the provision of investment advice.
Levine said that the sweep will likely run along the lines of the guidance on digital advice platforms that the SEC issued in February, when it affirmed that robo advisory services still have a fiduciary duty, and warned of potential issues around disclosure and client communications.
After initial industry resistance, the robo advice model is rapidly blooming. Aite Group estimates the digital advice market will reach $160 billion by the end of the year, and jump to $400 billion in assets by the end of 2018.
Also this year, the SEC is planning to launch a sweep looking at how firms that traffic in money market funds are incorporating the rules the SEC adopted to shore up that sector following the destabilizing run in 2008. "We're testing to see compliance with the rules," Levine said.
As part of a broader focus on retail investors saving for retirement, the commission is also planning to launch a sweep exam looking at how firms are adhering to the schedules laid out in the disclosures of target-date funds, and another probing the controls advisors have in place on fixed-income cross trading relating to retirement accounts.
Those new sweeps will come on top of several ongoing examination efforts, including probes into ETFs and advisors' cybersecurity practices that aren't likely to wrap up any time soon.
"I would expect that in the next fiscal year we'll be very focused on retail, and will remain focused on it," Levine added.
Levine's comments track closely with what some outside observers expected from Clayton, a veteran Wall Street attorney who has represented major financial institutions in litigation and provided counsel for mergers and acquisitions.
ATTENTION ON BROKER HIRES
Additionally, the SEC's exam team is looking into issues around evolving advisory firm structures and hiring practices.
One of those is the multi-branch advisor initiative, where commission staffers are scrutinizing the firms that have been expanding into a model of maintaining a home office and multiple branch offices.
"We've seen an increasing number of IAs using the BD branch model," Levine said. "Obviously that branch model has attendant risks relating to compliance and supervision issues, and we're taking a look at that."
The SEC has also identified a trend of brokers who have faced disciplinary action from FINRA exiting the broker-dealer world and reemerging on the investment advisory side. Those movements have been prevalent enough that the SEC has launched a sweep looking at the firms who hire brokers with a disciplinary history, what supervisory controls they have in place, and how they disclose those past issues to clients.
"It is not to tell advisors who to hire, who not to hire, but if you do hire folks who have a disciplinary history, we want to make sure that you're fully aware, that you're fully informing the investing public and that you have particular controls in place with respect to these folks," Levine said. "And so by hiring them, yes, you do come on our radar screen probably for some attention."
Register or login for access to this item and much more
All Financial Planning content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access