More On Legal & Compliancefrom The Advisor's Professional Library
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
Procedures designed to protect retail investors from the purchase of unsuitable structured securities products (SSPs) might have been inadequate or missing, according to a report issued by SEC staff on Wednesday.
In an examination conducted by SEC staff of 11 broker-dealers, gaps were found in the way customers were informed of the nature of SSPs, in both expense and risk. The reports cited such practices as pricing, and training of supervisors and registered representatives as problem areas offering the potential for clients to be sold SSPs when such products did not fit with their risk tolerance.
The staff found a number of possible deficiencies, including:
- Recommendations of unsuitable SSPs to retail investors;
- Trading at prices disadvantageous to retail investors;
- Omission of material facts about SSPs offered to retail investors;
- Engagement in questionable sales practices with customers.
In a statement, Carlo di Florio, director of the SEC’s office of compliance inspections and examinations, said, “Sales of structured products to retail investors have increased over recent years and may continue to increase as they are marketed as a higher return investment alternative. This report could help companies strengthen their compliance programs to better address the issues we observed during our sweep and in subsequent exams.”
He added, “Beyond this report, we are monitoring the way in which these products evolve, and are considering additional steps in the near future relating to structured securities products that may further bolster investor protection.”
Six major categories of observations were cited in the report: customer suitability (customer specific suitability and concentration risk); disclosure documents; customer account statement classification; secondary market pricing; training; and secondary market activity.
Based on these observations, the staff report made recommendations for both large and small broker-dealers that included closer attention to training, suitability, and disclosure, among other things.