The headquarters of the United States Securities and Exchange Commission (SEC).
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The Securities and Exchange Commission will study conflicts of interest in financial advice more vigorously this year, at a time when market conditions may lead brokers to take advantage of clients more frequently, the agency said Wednesday. federal.
The financial regulator will prioritize fraud, sales practices and conflicts between advisers and financial brokers, the SEC said in its annual list of review priorities, which outlined its oversight agenda for those companies for 2021.
It will aim to protect especially conflicts that harm the elderly and retirement savers.
“Recent market volatility and industry pressures have affected commissions and other revenue collected by companies,” the agency wrote. “These conditions can lead to increased financial stress on companies and their staff, which in turn can lead to an increase in cases of fraudulent conduct.”
Account volume and type
Conflicts of financial interest can take many forms.
A broker may, for example, try to sell an investment fund or annuity that has a higher commission than another similar investment, but that may not be the most appropriate for the client.
The SEC will focus on recommendations to clients in areas such as account type (e.g., an account that carries fees versus flat annual fees) and changes, from a 401 (k) plan to an individual retirement account.
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It will also examine companies ’sales practices for various types of investments such as structured products, publicly traded funds, real estate investment trusts, private placements, annuities, digital assets, municipal bonds and others, and microcap securities. said the agency.
In addition, it will examine brokerage firms to assess whether they meet standards relating to giving retail investors access to complex strategies such as options trading.
Better Interest Regulation
Brokers have long operated on a legal playing field different from financial advisors.
Financial advisors have a fiduciary duty to give advice that is of interest to the client, while brokers have a less strict obligation.
(Although, perhaps counterintuitively, some brokers may legally call themselves “advisors.” And many may choose when they function as one or the other).
In 2019 the SEC issued a rule, Best Interest Regulation, to reduce these conflicts of interest in financial advice.
While it has led many brokerage firms to change their behavior (e.g., banning the sale of certain investments), investors ’advocates think it still allows brokers to give conflicting advice to clients.
The SEC will also focus its examinations on compliance with the regulations of brokerage firms, known as Reg BI. Prior examinations had focused on the processes companies used to apply the standard; in 2021, the SEC will expand the scope of its control, the agency said.
The number of SEC-supervised consulting firms has grown significantly in recent years, to nearly 14,000, from 12,000 five years ago. At the same time, customer assets grew by about $ 30 trillion, to $ 97 trillion.
The SEC completed about 2,950 reviews of financial advisory firms last year, a 4 percent drop from 2019 that is primarily due to the impact of the Covid pandemic, he said.
Conflicts of interest have been ranked this year among the SEC’s top review priorities. The agency also focuses on other issues such as climate risk, information security, financial technology and the fight against money laundering.