One of the complaints voiced by private equity firms when put under the scrutiny of the Securities and Exchange Commission was that their fund investors were sophisticated and adept when making their investment choices so there were fewer problems. Some of the actions coming out of fund review has proven that thesis may not be entirely true.
The argument was that retail investors were less sophisticated and more likely to be subject to fraud. The SEC has decided to dedicate resources to specifically focus on retail investors with the launch of the Retail Strategy Task Force.
Last month, the SEC announced that “The Retail Strategy Task Force will develop proactive, targeted initiatives to identify misconduct impacting retail investors.”
We have gotten a bit more color on the Task Force.
The issues we see in this space are extensive and often involve widespread incidents of misconduct, such as charging inadequately disclosed fees, and recommending and trading in wholly unsuitable strategies and products. Some more specific examples of some of the problems we are continuing to see:
- 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 highly volatile products products like inverse exchange-traded funds (ETFs) for long-term investment.
- Sale of structured products to retail investors and failing to fully and clearly disclose fees, mark-ups, and other factors that can negatively impact returns.
- Churning and excessive trading that generate large commissions at the expense of the investor.
The Task Force will combine examination, enforcement and public education teams to better protect investors.
This does not mean that the SEC is ignoring private funds. Stephanie Avakian, Co-Director, Division of Enforcement stated:
“Finally, I want to address one question that we have received a lot since announcing our retail focus; that is, whether our enhanced retail focus means that we are allocating fewer resources to financial fraud or policing Wall Street. The answer to that question is simple: No, we are not. The premise that there is trade-off between “Wall Street” and “Main Street” enforcement is a false one.”
Sources:
- SEC Announces Enforcement Initiatives to Combat Cyber-Based Threats and Protect Retail Investors
- The SEC Enforcement Division’s Initiatives Regarding Retail Investor Protection and Cybersecurity speech by Stephanie Avakian, Co-Director, Division of Enforcement (Oct. 26, 2017)