More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
The Financial Industry Regulatory Authority is warning broker-dealers not to stretch the truth when marketing “free” individual retirement accounts to investors.
In the just-released Regulatory Notice 13-23, FINRA says that some brokers are using “overly broad language” in sales materials, implying that there are no fees charged to investors who have accounts with the firms. In other instances, FINRA says that “specific fees that are not charged are highlighted and separated from disclosure regarding other fees that may be charged,” which may “mislead investors” regarding the cost of opening, maintaining or closing an account.
Broker-dealers’ marketing campaigns “often emphasize that fees are not charged in connection with their retail brokerage accounts and IRAs,” FINRA states.
However, FINRA states that because closing and maintaining accounts typically involve some cost to investors, either associated with the account itself, the underlying investments or the services of the broker-dealer, “it would generally be inconsistent with FINRA Rule 2210’s requirements to claim or imply that accounts are ‘free.’”
For example, referring to an IRA account as a “free IRA” or “no-fee IRA” where costs exist would fail to comply with Rule 2210’s prohibition of false, exaggerated, unwarranted, promissory or misleading statements or claims, the self-regulator says.
Rule 2210 also requires that communications provide “a sound basis for evaluating the facts with respect to any product or service,” FINRA notice states. Accordingly, “claims regarding fees must be accompanied by clear disclosure of the types of fees that may be charged.”
The notice gives this example. If an account offered by a broker-dealer involves account maintenance and closing fees, fees associated with the ownership of investments in the account or brokerage service fees, a stand-alone claim such as “Start investing for less with no account opening fees” would not comply with the rule.
The claim could be compliant, however, if it explained other fees that applied, the notice says. For example, the following modified claim may be fair and balanced: “Start investing for less with no account opening fee. Other account fees, fund expenses, brokerage commissions and service fees may apply.”
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