In 2021, the Securities and Exchange Commission carried out thousands of audits within the financial services industry, resulting in $45 million in excessive fees and other charges being returned to investors. The federal agency, which oversees and regulates the securities industry, said their annual inspections of financial advisory firms and related oversight could net even more money for investors in 2022. Below, we’ll take a closer look at what the SEC has in store for the investment industry in 2022, what the focus of the annual audits will be and what it could all mean for individual investors.
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What Is the SEC’s Annual Exam?
Despite sounding like a test given to investment advisors, the SEC’s National Exam Program is the agency’s annual regulatory inspection of different corners of the financial services industry. Conducted by the SEC’s Division of Examinations, these annual audits assess whether investment advisors, broker-dealers, investment companies and others are observing federal securities laws and rules. SEC inspectors also evaluate whether entities adhere to the disclosures they have made to clients, customers, the general public and the SEC, as well as their implementation of supervisory systems or compliance policies.
Representatives of the SEC have the authority to conduct these inspections at any time. However, each year the agency publishes a report detailing its examination priorities for the coming fiscal year.
As the number of registered investment advisors (RIAs) continues to grow, so too does the scope of the SEC’s annual examinations. Fiscal year 2021 saw some of the fastest year-over-year growth in the RIA space, according to the SEC, as the industry added a net total 900 RIAs. That increase punctuated a five-year period during which the number of RIAs jumped 20%, going from approximately 12,250 to more than 14,800.
As a result, the SEC carried out a total of 3,040 examinations in 2021, including 2,200 inspections of investment advisors. Those exams resulted in 2,100 deficiency letters, prompting some firms to return $45 million in fees and other charges back to investors and make corrections in how they were calculating those fees. Even more money could be returned to clients as a product of those audits, the SEC wrote in its 2022 Examination Priorities Report:
“As we move further into FY22, we anticipate there will be more money returned to investors, and there will be additional referrals to Enforcement resulting from our FY21 examinations.”
What to Look for in 2022
In 2022, the SEC examinations will focus specifically on private funds, products and services related to environmental, social and governance (ESG) investing, emerging technology and crypto assets, as well as information security.
As it has in years past, the SEC will also evaluate whether financial advisors are adhering to their fiduciary duty to act in the best interest of their clients. Examinations of RIAs in 2022 will assess how advisors consider investment alternatives for clients, including the potential risk, rewards and costs associated with alternatives. RIAs will also be evaluated for how they manage potential conflicts of interest, their Form ADV and Form CRS disclosures and account selection.
Specifically, SEC inspectors are expected to home in on whether advisors recommend or hold more expensive classes of investment products when lower-cost alternatives are available. For example, an advisor may recommend a no transaction fee mutual fund with 12b-1 fees to a client because the advisor may otherwise be responsible for paying the transaction fees. The SEC will also assess whether advisors are recommending proprietary products that result in additional or higher fees.
The SEC’s Division of Examinations is responsible for auditing registered investment advisors (RIAs) and other entities in the financial services industry to ensure that the laws and regulations surrounding securities and financial advisory services are being followed. In 2021, the SEC examined 2,220 investment advisors and issued 2,100 deficiency letters. As a result, firms paid back some $45 million to investors who had been overcharged previously. The SEC said investors should expect even more being returned this year as a result of the 2021 inspections.
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