Tags: SEC | broker | dealer | adviser

SEC Communes With Compliance Community

By    |   Thursday, 06 Feb 2014 06:36 AM

On Jan. 30, nearly a thousand chief compliance officers and other chiefs of mutual funds crammed into the headquarters of the Securities and Exchange Commission (SEC) to receive instruction on compliance issues the Commission has identified as important for funds to attend to in preparation and follow-up for the examinations the staff conducts on a rotating basis.

The program managed to cram perhaps four hours of material into about twice that amount of time by giving a premium to giving face time to its far-flung examination and enforcement staff.

In opening remarks, SEC Chairman Mary Jo White gave a pep talk to the industry about how important the industry is to the country and that the compliance people within the investment advisers and mutual funds are supposed to set the right tone, beginning at the top of the firms. There are 9,700 mutual funds and another 30,000 hedge funds and private equity funds, with a total of $55 trillion under management, roughly four times the nation's GDP.

There is instruction here, as well, for customers of mutual funds, as they have an opportunity to eavesdrop on the conversation between the thinly stretched staff at the SEC and the industry.

One gets the distinct impression that enforcement takes place selectively when things get so bad that even the Commission is embarrassed, and it decides to send a message to the industry to tighten up a bit. Customers can learn some of the tricks of the trade and try to be more wary.

Here are some tricks to watch out for, based on the words of the experts:

• Improper fees. It is common for a management group to operate as what are called "dual registrants," which means they act as both broker-dealers and investment advisers. As broker-dealers, they would not charge the customer unless there are actual trades, whereas as an investment adviser, they might charge, for example 1 percent of assets under management. Staff noted that there has been a trend toward moving customers from the broker-dealer side to the investment adviser side, in order to increase income to the firm.

• Improper expenses. Some operating expenses are appropriately charged to the management company, whereas others are supposed to be charged to the funds, which means to the investors. Some fund groups inappropriately push down to the funds expenses that the manager is supposed to bear. One of the most common abuses is for fund investors to be charged for "distribution" expenses that primarily benefit management.

• Conflicts of interest. These come in virtually infinite varieties, but one example is that a fund might provide "ancillary services," such as record keeping from entities in which management has an interest at a higher fee than they could be obtained in the market.

For several years, the Department of Labor has conducted a regulatory project to try to eliminate confusion as to the duties owed by a broker-dealer versus an investment adviser. A broker-dealer is required only to offer products that are "suitable" for the customer, whereas an investment adviser is supposed to act in the customer's best interest. The industry has been fighting this regulation and has enlisted the SEC to support its cause.

(Archived video and related materials can be found here.)

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Robert-Feinberg
On Jan. 30, nearly a thousand chief compliance officers and other chiefs of mutual funds crammed into the headquarters of the Securities and Exchange Commission (SEC) to receive instruction on compliance issues.
SEC,broker,dealer,adviser
543
2014-36-06
Thursday, 06 Feb 2014 06:36 AM
Newsmax Inc.
 

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