Broad SEC Initiative Targets RIAs and Brokers

SEC staff intends to revamp focus on registered investment advisers and broker/dealers selling investment products to retail investors and retirement savers.

The Securities and Exchange Commission (SEC), through its Office of Compliance Inspections and Examinations (OCIE), is launching a multi-year retirement-targeted industry reviews and examinations initiative, known as “ReTIRE.”

According to the SEC, the ReTIRE initiative will focus examination staff on “certain registered investment advisers and broker/dealers that provide services or sell investment products to retail investors. Examination focus areas include: reasonable basis for recommendations; conflicts of interest; supervision and compliance controls; and marketing and disclosures … OCIE is focusing on retirement-based savings in recognition of the complex and evolving set of factors that retail investors face when making such investment decisions.”

Some of these factors include the broadening and changing array of investments and support services available to individual retirement savers, along with increasing demand on the defined contribution (DC) and individual retirement account (IRA) portions of the savings and investment markets, where untrained individuals are often called on to make tough financial decisions. SEC further explains the ReTIRE project will “focus on certain higher-risk areas of registrants’ sales, investment, and oversight processes, with particular emphasis on select areas where retail investors saving for retirement may be harmed.”

In announcing the initiative, the SEC says it is pushing OCIE staff to more aggressively use data analytics, information from prior examinations, and examiner-driven due diligence to identify registrants to examine. The ReTIRE examination effort comes as the SEC contemplates adopting a stronger fiduciary standard to more closely match rulemaking ongoing at the Department of Labor—causing no small amount of concern among advisers and their service providers partners already facing substantial regulatory and examination pressures.

Marcia Wagner, managing director of The Wagner Law Group, tells PLANADVISER many in the retirement advisory industry already feel there is a “regulatory tsunami” bearing down on them, so there’s not likely to be much appreciation for the SEC’s announcement about ReTIRE.

“While the SEC has every right to implement this project, I am greatly concerned with the compliance tsunami headed right for advisers and brokers who are doing more than Washington, D.C., to get participants to save for retirement,” she says. “My hope is that this SEC effort and compliance with the proposed conflict of interest rule by the DOL do not crowd out these efforts. Without a doubt, having a prudent process in place and taking into account the best interests of participants has never been more important and should provide the basis for staying out of trouble.”

The SEC outlined four main areas in which the ReTIRE initiative will focus. These include, first, whether advisers and brokers are developing reasonable bases for investment recommendations, especially when it comes to selecting the type of account for a given client, performing due diligence on investment options, making initial investment recommendations, and providing on-going account management.

Second, the OCIE staff will focus on reviewing registrants’ sales and account selection practices “in light of the fees charged, the services provided to investors, and the expenses of such services.” The SEC observes many registrants have inherent conflicts of interest that exist as a result of, among other things, their business structure, compensation structure, personal issues or relationships, or relationships with service providers. Generally, SEC says registrants will be expected to identify material conflicts of interest, to design compliance programs to address the risks caused by those conflicts, and/or to disclose material conflicts of interest.

Third, OCIE staff will focus on advisory staff supervision and compliance controls, to determine whether registrants are reasonably designing policies and procedures that are tailored to each firm’s business risks and client needs. As noted by the SEC, “staff will review registrants’ controls, oversight, and supervisory policies and procedures, as appropriate, and for compliance with any applicable specific requirements discussed therein. In addition to these review areas, the staff may focus on: (i) registrants with operations in multiple and/or distant branch offices and (ii) representatives with outside business activities.”

Finally, the ReTIRE initiative includes close reviews of marketing and disclosure activities of SEC registrants. Staff will review materials distributed to investors to make sure they are not deceptive or misleading—either by inaccuracies or omissions. Staffers will review broad ranges of marketing deliverables, such as brochures and other sales and marketing materials.

SEC warns these are the primary focus areas for the ReTIRE Initiative, but examiners may select additional topics based on operational and other risks identified during the individual examinations. Additional information about the initiative is presented here