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Regulation and Compliance > Federal Regulation > SEC

Beware, the SEC Is Coming for You!

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What You Need to Know

  • The current administration seems to believe advisors get paid too much for doing too little; the industry must push back.
  • What the SEC continues to clearly miss is that advisors are spending more time and resources on compliance — but not for the benefit of their clients.
  • In addition, too many examiners continue to lack the necessary working knowledge of the industry that they are charged with examining.

Beware! Never before have I seen a more aggressive Securities and Exchange Commission. They’re coming for all advisors. Their mission: to cause financial pain.

“Tom, come on, you can’t be serious,” you’re probably saying. Oh, but I absolutely am. I warn advisors not because I or my firm are trying to “scare up” more clients.

On the contrary; I am in the latter stages of my career, and I am troubled by what I see on an all-too-frequent basis. I feel compelled to speak out on behalf of the industry that I admire and respect. I truly wish I didn’t have to write this.

During the past 35 years, I have most likely been through more SEC exams than any attorney in the country. Although I have not counted, I assume that it is substantially in excess of a thousand exams.

There’s something profoundly different about the SEC under the Biden administration — and not for the better. It is much more progressive and aggressive relative to the advisors that it regulates. This administration seems to believe advisors get paid too much for doing too little — and the industry must disabuse the commission of such a belief.

These troublesome changes are not devised at the SEC’s branch levels. The vast majority of branch employees are fair-minded hardworking professionals who are charged with carrying out the directives of the commission’s C-Suite leadership.

During current examinations, advisors are too often presumed to be potential financial predators, seeking to take advantage of their clients where and whenever possible.

The onus is on the advisor to dispel such presumptions during the examination process. Plus, the SEC does not discriminate between big and small, fee-only and fee-based advisors. Moreover, given the transition to remote exams, the examination process can take in excess of one year from start to finish.

What the SEC continues to clearly miss is that advisors are spending more time and resources on compliance — but not for the benefit of their clients. It’s only for them to be better positioned to complete a prospective overly aggressive SEC exam.

Don’t Be Afraid to Push Back

What do I mean by financial hardship, which I referred to at the start of my piece?

The commission’s examination objective appears to seek to cause advisory firms to reimburse clients for a myriad of issues, including client fee/billing process, inartful drafting of (or conflicts between) Part 2A or advisory agreements (inartful drafting will be construed against the advisor), minimum fees and charging on assets for which the advisor does not maintain trading authority.

At the same time, the SEC seeks the eradication of any advisory agreement provision whereby an advisor seeks to limit its liability, and it continues to interpret Act and Rule provisions contrary to the advisor even when there is no express support for same, or the commission’s findings appear to be contrary to its own Act, Rules, or published guidance.

In addition, too many examiners continue to lack the necessary working knowledge of the industry that they are charged with examining, which can prove very frustrating to those examined.

SEC exam findings’ letters are unfortunately too often way too aggressive, construing “alleged” inadvertent errors/omissions as clear breaches of an advisor’s fiduciary duty and Act/Rule violations.

Be careful when responding to such letters to make clear where you might respectfully disagree with any of the findings and/or an assertion that you have breached your fiduciary duty to the client. Do not agree with such misconduct when you earnestly believe such a finding to be inappropriate.

The SEC has a job to do: protect the investing public. I respect and support that mission. When it is clear that an advisor has engaged in misconduct, prosecute them.

That said, please remember that advisors provide a valuable service to those that the commission seeks to protect. They are not potential predators, but hardworking professionals who seek to serve their clients to the best of their abilities every day.

Yes, mistakes are made, both advisors and regulators are human. The SEC and the advisory industry are comprised of good people deserving mutual respect.

***

Thomas D. Giachetti is chairman of the Investment Management and Securities Practice of Stark & Stark. 

Credit: ink drop/Adobe Stock


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