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Regulation and Compliance > Federal Regulation > SEC

SEC Panel: 2 Big Problems With Advisor Background Checks

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The big headlines at the Securities and Exchange Commission over the past few years — and which concern advisors and their partners most — revolve around a broadened fiduciary standard rulemaking and other studies and rulemakings stemming from the Dodd-Frank Act.

At a meeting Thursday of the SEC’s Investor Advisory Committee (whose existence itself was mandated by Dodd-Frank), the subject was the flip side of advisors’ concerns about SEC, state and Financial Industry Regulatory Authority oversight: how — and whether, it turns out — end clients conduct background checks on RIAs and registered reps whom they’re considering hiring. It turns out that the overwhelming majority of investors fail to conduct any background check whatsoever of their prospective advisors.

“The single most important decision an investor makes is who to rely on for advice,” said Committee member Barbara Roper of the Consumer Federation of America, “ because afterward they will do whatever that person says” to do about their finances.

Lori Shock, director of investor education and advocacy at the SEC, said during the Committee’s quarterly meeting at SEC headquarters in Washington that 85% of investors fail to conduct any background check before hiring an advisor. Of those who do, most simply do a Google search of the advisor’s name. SEC Commissioner Kara Stein in her opening comments said she was concerned that “investors are left to Google” prospective advice-givers, which can provide limited and potentially biased information. SEC Chairwoman Mary Jo White delivered an update on the Commission’s priorities this year  while Commissioner Michael Piwowar expressed his support for the panel’s deliberations, which is likely to result in recommendations to the SEC at the Investor Advisory panel’s next full meeting in July.

Other Committee members argued that one of the SEC’s goals should be to better inform investors of the background checking tools that are available to them through the SEC and state IAPD database and FINRA’s BrokerCheck. One Committee member, Anne Sheehan of the California State Teachers’ Retirement System, acknowledged that “it’s a big ask for the SEC to take the lead on this,” but that “from an investor protection standpoint” it was a necessity.

In the polite give and take during the morning portion of the meeting, many suggestions were made to improve the information available to investors, particularly in identifying “bad actors” among advice givers. Questions were also raised about the possibility of adding insurance agents, mortgage brokers and other financial professionals to a single investor-friendly database.

Panel member Joseph Carcello, a professor at the University of Tennessee’s business school, asked whether any regulators were vetting the information that advisors and registered reps provide to regulators. After all, he said, he could easily imagine that “bad actors” would happily file false or misleading information on their regulatory self-disclosures, though Anna Boucher of the SEC pointed out that advisors at least would be liable to sactions if they filed false information and another panel member said broker-dealers confirm the accuracy of brokers’ disclosures, at least “when they’re hired.”

Recently named SEC Investor Advocate Rick Fleming pointed out that there are many individuals who could be involved in the sale of securities, “not just registered people,” asserting it would be desirable to include them in a single database.

The information that is available to investors from regulators at this point only covers registered persons, and Roper said she hoped the Investor Advisory panel’s recommendations would include a way “to close that gap” between registered and unregistered financial professionals.

“I hadn’t looked at BrokerCheck in a while,” Roper said, and was pleased to see “a huge improvement” in that tool which was demonstrated to the panel by the SEC’s Shock. But Roper stressed that “from the viewpoint of investors” much more has to be done, evidenced by investors’ lack of understanding of the difference between brokers and advisors.

She stressed the urgency of making background checks easier, broader and more user-friendly for investors, saying “we need to think about how to make the information pesented better to investors” ahead of time. “The single most important decision an investor makes is who to rely on for advice,” she said, “ because afterward they will do whatever that person says” to do about their finances.

Committee Chairman Kurt Schacht of the CFA Institute cautioned that improving background tools “will take time.” He voiced support for “one centralized place to go” for information on any financial professional offering services to the public, saying he saw the value in investors finding if someone they were considering hiring wasn’t registered. “If they don’t show up” in a search of all registered persons, the investor would understand “you need to be very careful” about working with that individual. “Right now,” he said, “you can’t conclude that.”

— Check out SEC Chief: Fiduciary, Third-Party Audit Rules to Advance This Year on ThinkAdvisor.


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