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SEC to Sharpen Focus on Robos, Share Class Selection, ETFs

Robo advisors, retirement investments and share class selection are on the Securities and Exchange Commission’s focus list for 2017.

For its annual report of exam priorities, the SEC noted that its 2017 priorities were organized around three thematic areas:


  • examining matters of importance to retail investors;

  • focusing on risks specific to elderly and retiring investors; and

  • assessing market-wide risks.


Robo Risks

With regard to the robo-advisor focus (more specifically electronic investment advice), the SEC says its examinations will likely focus on registrants’ compliance programs, marketing, formulation of investment recommendations, data protection, and disclosures relating to conflicts of interest. The SEC said it would also review firms’ compliance practices for overseeing algorithms that generate recommendations.

Share class selection, which has been a litigation focus in a number of recent cases, was also on the focus list. The SEC said it will “continue reviewing conflicts of interest and other factors that may affect registrants’ recommendations to invest, or remain invested, in particular share classes of mutual funds.” They cited as an example the identification and assessment of conflicts that certain investment advisory personnel may have, such as those who also are registered representatives of a broker-dealer, which may influence recommendations in favor of share classes that have higher loads or distribution fees. Also under the microscope: the formulation of investment recommendations and the management of client portfolios.

Regarding wrap fee programs, the SEC said it would likely review whether investment advisers are acting in a manner consistent with their fiduciary duty and whether they are meeting their contractual obligations to clients. Areas of interest may include wrap account suitability, effectiveness of disclosures, conflicts of interest, and brokerage practices, including best execution and trading away, according to the SEC.

Retirement Accounts

The SEC said it would continue its multi-year “ReTIRE” initiative, focusing on investment advisers and broker-dealers along with the services they offer to investors with retirement accounts. In 2017, the SEC said those examinations would likely focus on, among other things, registrants’ recommendations and sales of variable insurance products as well as the sales and management of target-date funds.

The SEC also indicated it would examine investment advisers to public pension plans to assess how they are managing conflicts of interest and fulfilling their fiduciary duty. “We will also review other risks specific to these advisers, including pay-to-play and undisclosed gifts and entertainment practices,” they said.

Also on the exam priority list were:


  • How firms manage their interactions with senior investors

  • Exchange-traded funds

  • Never-before-examined investment advisers

  • Recidivist representatives and their employers

  • Multi-branch advisers

  • Money market funds

  • Cybersecurity

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