Washington D.C. partner Mark Costley was quoted in an Investment News article titled, “SEC Takes Deep Dive on Conflicts of Interest.”
The SEC's annual list of examination priorities included some surprising topics as the commission said that it will work to uncover different ways that business models, practices and products may provide incentive for financial advisers to act outside their clients' best interests.
The letter echoed concerns of other regulators around areas such as retirement account rollovers while also adding some focuses such as wrap fee accounts, issues around dually registered advisers and compensation of investment advisers.
“It's a piece of a larger trend over the last three or five years. We're seeing a continued focus on conflicts of interest and the variety of ways these conflicts arise,” said Mark.
Mark continued, “Firms should use the letter as a guide as they contemplate unintended consequences or conflicts of interest that underlie common practices. It's another good thing for folks in the industry to be mindful of.” For example, “Have I identified conflicts of interest? Have I made robust disclosures? Have I taken steps to minimize it?”
In the letter, the regulator said that it plans to review firms' processes for monitoring wrap fee programs and “will assess whether advisers are fulfilling their fiduciary and contractual obligations to clients.”
Wrap accounts generally include separate accounts, unified managed accounts, and discretionary accounts and other managed platforms where the adviser receives an annual fee for directing the investments rather than making commissions for trades.
Although they can help safeguard against churning and can save money for investors who are very active traders, firms have to be on the lookout for areas where the advisers may move money into a fee account unnecessarily, said Mark.
“There is a potentially a bigger risk of a conflict there if the portfolio manager is putting client accounts in there that don't really do a lot of trading and is getting a higher fee,” he said. “The larger, more sophisticated firms do have some procedures around that and monitoring systems in place to try to keep mindful of that.”
To view the entire article in Investment News, click here.