Headquarters of the US Securities and Exchange Commission (SEC).
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The Securities and Exchange Commission will look at conflicts of interest in its financial advice more forcefully this year, at a time when market conditions may cause brokers to take advantage of clients more frequently, the federal agency said on Wednesday.
The financial regulator will prioritize fraud, selling practices and conflicts between financial advisors and brokers, the SEC said in its annual list of review priorities, which outlined its oversight agenda in 2021 for such firms.
It will aim to protect in particular against conflicts that harm the elderly and pensioners.
“Recent market volatility and industry pressures have affected commissions and other revenues collected by firms,” the agency wrote. “These conditions can cause increased financial stress for companies and their staff, which in turn can lead to increased cases of fraudulent conduct.”
Transfers and account types
Conflicts of financial interest can take many forms.
A broker may, for example, try to sell a mutual fund or annuity that has a higher commission than another similar investment, but may not be the most suitable for the client.
The SEC will focus on recommendations to clients in areas such as account type – for example, an account that carries fees versus fixed annual fees – and transfers from a 401 (k) plan to an individual retirement account.
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It will also analyze the selling practices of firms for different types of investments, such as structured products, exchange traded funds, real estate investment trusts, private placements, annuities, digital assets, municipal bonds and other bonds and microcap securities. , said the agency.
In addition, it will examine brokerage firms to assess whether they meet the standards for retail investor access to complex strategies, such as options trading.
Regulation of best interest
Brokers have long been operating in a different legal field from that of financial advisers.
Financial advisers have a fiduciary duty to provide advice in the interest of the client, while brokers have a less strict obligation.
(Although, perhaps counterintuitively, some brokers may legally call themselves “advisors.” And many may choose when to work as one or the other.)
The SEC issued a rule – the Best Interest Regulation – in 2019 to reduce such conflicts of interest in financial advice.
Although it has led many brokerage firms to change their behavior (for example, by banning the sale of certain investments), investor advocates believe that it allows brokers to offer conflicting advice to clients.
The SEC will also focus its examinations on the compliance of brokerage firms with the regulation, known as Reg BI. Previous exams have focused on the processes companies have used to implement the rule; In 2021, the SEC will expand its scope of control, the agency said.
The number of consulting firms overseen by the SEC has grown significantly in recent years – to almost 14,000, up from 12,000 five years ago. At the same time, customer assets increased by about $ 30 billion to $ 97 billion.
The SEC completed about 2,950 reviews of financial consulting firms last year, a 4 percent drop from 2019, which is largely due to the impact of the Covid pandemic, he said.
Conflicts of interest have been ranked among the most important review priorities for the ESA this year. The Agency also focuses on other issues such as climate risk, information security, financial technology and the fight against money laundering.