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Regulation and Compliance > Federal Regulation > SEC

Beware: The Bully Lives

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Much to my chagrin, the SEC recently has demonstrated an increasingly aggressive posture during regulatory examinations. I wish I could report to the contrary. Unfortunately, over the past six to nine months or so, during too many exams, I have seen a “guilty until you can prove your innocence” to the Commission’s approach.

At times, the Commission has been reticent to exit an exam without seeking to extract some form of monetary assessment (from minimal to substantial), when, in my opinion, no such assessment is or was generally warranted, and/or the scope and size of the assessment was too expansive or borderline punitive. Unfortunately, the tone at the Commission relative to investment advisors has changed, and not for the better, and without little warning.

There appears to be an unfortunate growing disrespect by the SEC for the role that advisors fulfill for their clients, sometimes bordering on distrust. For example, regarding portfolio turnover and corresponding advisory fees, the SEC’s posture is: Prove to us that your services are worth your fees — you have too low portfolio turnover to merit such a fee!

Regardless of disclosure of the fee structure, the SEC seeks to supplant the client’s judgment as to what is fair and reasonable at times. Further, the corresponding value of an advisor’s services is under an ever-increasing expansive SEC interpretation of an advisor’s “fiduciary duty” to its clients.

One example is the current aggressive focus on mutual fund share class (i.e., purchase of “no transaction fee” funds vs. institutional share class) and corresponding 12b-1 fee issues. I appreciate the Commission’s review of these issues and its desire to change industry practices by focusing advisors on a more initial and ongoing in-depth review of practices relative to the fund share class determination.

However, the Commission often is applying its review and remediation demands retroactively to periods prior to the SEC having made clear that such issues were of major concern. It has become standard practice for the Commission to increase the examination period from the usual two years (give or take) to five years, especially when addressing these, or any other issues relative to client fees. By doing so, the amount of money the Commission demands to be refunded to clients is substantially increased.

Compounding the above and unrelated examination issues is the ever-increasing uneven review of certain exam issues and application of remedies among different Commission branches, and sometimes, within the same branch. Certain branches appear to focus on certain issues, while others don’t even address them — or if addressed, do so nowhere near the extent of other branches. Why is it so hard to have a uniform examination process?

Please don’t misconstrue my views on this matter. I respect and support the Commission’s mandate to protect the investing public. Unfortunately that mandate, whether intended or not, has now been colored with a perceived desire to punish. I am absolutely fine with punishing wrongdoers.

Unfortunately, the scope of what now is considered to be wrongdoing or inappropriate activity has drastically increased in a much too often unannounced, uneven, and at times, punitive manner. The industry deserves better from its regulator.


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