In the U.S., registered investment advisors have fiduciary obligations to their clients, yet compliance reviews by the U.S. Securities and Exchange Commission (SEC) continue to find an array of conflicts of interest that aren’t being adequately managed, or disclosed.
The SEC’s Division of Examinations published a “risk alert” on Tuesday detailing the results of recent reviews of the financial incentives that advisory firms and their reps have when recommending products, services and account types to clients.
Among other things, those reviews uncovered compliance policies that don’t properly deal with conflicts of interest, conflicts that weren’t properly disclosed, and firms’ practices that weren’t consistent with their advisory agreements and disclosures to clients.
For instance, it found issues with advisors’ recommendations for clients’ uninvested cash — including firms that charged fees beyond what was agreed, or disclosed; firms that failed to disclose conflicts, such as recommending cash management programs from affiliated entities; and advisors that didn’t disclose how their recommendations impacted their own compensation, or how the fees levied by these programs impacted investors’ returns.
The reviews also found similar conflicts, and compliance and disclosure failures, that arose from advisors’ recommendations about mutual fund share classes — selecting among classes that apply different sales charge and fee structures.
“The staff observed [advisors] that did not provide full and fair disclosure of the economic benefits to the [advisors] with respect to the [advisors’] recommendations regarding custodial credits, margin loans and credits, and transaction markup fees,” the alert noted.
It also found firms making disclosures to clients that were inconsistent with other disclosures provided by the firm, and advisors calculating and assessing clients’ fees that didn’t match the terms of advisors’ agreements, disclosures, or both — such as assessing incorrect fee rates, double charging fees, not rebating transaction fees as stipulated in an agreement, or charging fees that were inconsistent with the services actually provided.
Finally, the division also found firms that didn’t implement policies and procedures designed to prevent regulatory violations.
“The staff continues to observe compliance issues when advisors have economic conflicts of interest with their clients,” the alert noted.
These issues have often led to advisors returning money to investors, revising their practices, and enhancing their disclosures, it said — and it called on firms to review and refine their own policies and practices to ensure that they are accurate and compliant.
“[Advisors] should also identify and address timely new conflicts of interest,” it stressed.