New SEC Task Force to Use Data to Root Out Advisor Fraud

The task force will be charged with identifying “those uses of data analytics that can be scaled more broadly, and that can be used in targeted ways to identify misconduct.”

While the task force will have a dedicated staff and work with the enforcement division’s Office of Market Intelligence and Center for Risk and Quantitative Analytics, along with other agency divisions such as the Division of Economic and Risk Analysis (DERA), and the Office of Compliance, Inspections and Examinations, the group “will not generally be responsible for conducting investigations,” Avakian explained.

“Retail” misconduct issues “are extensive and often involve widespread incidents,” she said, including problems the agency continues to see:

• Investment professionals steering customers to mutual fund share classes with higher fees, when lower-fee share classes of the same fund are available.
• Abuses in wrap-fee accounts, including failing to disclose the additional costs of “trading away” or trading through unaffiliated brokers, and purchasing alternative products that generate additional fees.
• Investors buying and holding products like inverse exchange-traded funds for long-term investment. These can be highly volatile products that are generally intended as a hedge against exposure to downward moving markets, and that face a long-term high risk of losing their principal. Yet the SEC is increasingly seeing retail investors holding these products long term, including in retirement accounts.
• Problems in the sale of structured products to retail investors, including a failure to fully and clearly disclose fees, markups and other factors that can negatively impact returns. And, abusive practices like churning and excessive trading that generate large commissions at the expense of the investor.

As to the new Cyber Unit, Avakian said the agency views its “potential enforcement interest in cyber-related issues” as falling into three separate types of cases.

• Cyber-related misconduct is used to gain some sort of unlawful market advantage;
• Failures by registered entities to take appropriate steps to safeguard information or ensure system integrity; and
• A cyber-related disclosure failure by a public company.

The enforcement division has brought cases related to the first two areas, but not the third, she said. 

— Check out SEC ‘Working on’ Fiduciary Rule, Concerned About State Laws: Clayton on ThinkAdvisor.