The SEC released its annual Examination Priorities for the new year in January. Among the list are two practices which may steer investors to accounts with higher fees than are warranted by their investment goals and situation. Specifically, the SEC expressed concern that investors may be overpaying in fee-based accounts and IRA rollovers when lower cost options are available.
Reverse Churning Possible at Financial Institutions
Fee-based accounts were initially developed in response to concerns about churning. Traditional accounts were commission-based, imposing a fee in order to conduct transactions. Brokers were incentivized to encourage trading even when it was not appropriate for the client’s investment strategy. However, issues with fee-based accounts cropped up shortly after they were implemented and drew attention from regulators.
Raymond James was fined by the National Association of Securities Dealers in 2005 for its fee based accounts. Raymond James converted nearly 3,000 accounts which had not made a trade for more than one year into fee-based accounts. Raymond James also didn’t monitor accounts to determine whether they were still appropriate for the program. Brokerage accounts where the customer stopped trading continued to be charged on a fee-based model.
UBS was sued by the New York attorney general’s office in 2007 for steering inappropriate customers into a fee-based account called InsightOne. UBS failed to screen the accounts to exclude investors with minimal trading activity, high cash levels and no-load mutual funds. Once it did implement guidelines for appropriate accounts, it allowed brokers to circumvent them. UBS settled the lawsuit for $23.3 million in 2007.
The SEC has expressed concern that this conduct may be happening again. It is known as reverse churning, which involves charging a fee for investment services that is not warranted by the activity or investment goals of the client. It may be seen in wrap fee programs, where a client is charged a fixed fee for investment advice and trade execution.
Sales and Marketing of IRA Rollovers Also Questioned
There have been a number of major news stories regarding retirement investments in the past two months. One which may have gotten lost in the shuffle is the regulatory scrutiny of sales and marketing practices of financial institutions running 401(k) plans and IRAs. When employees leave their employer, they have a number of options for the funds in their employer’s 401(k) plan. But the vast majority of the money is converted into an IRA at financial institutions.
This trend has drawn the attention of regulators. Both FINRA and the SEC listed IRA rollovers as a priority for 2014. Although consumer preference for rollover to IRA programs at financial institutions may be the result of current rules making rollover easier, there is concern it has been exacerbated by financial institution marketing favoring their own IRA program.
A GAO report issued in March 2013 found plan service providers were recommending plan participants roll over to an IRA. The GAO expressed concern about the potential conflict of interest and found it difficult to get the information necessary to make an informed decision about rolling over a 401(k).
If a financial institution is engaged in reverse churning or deceptively marketing their IRA, it violates the nation’s securities laws. Whistleblowers can play an important role in stopping these practices by reporting them to the SEC through the whistleblower program. In addition to the satisfaction of putting an end to the securities fraud, eligible whistleblowers are entitled to share in the recovery by the SEC.
McEldrew Young Purtell helps whistleblowers report fraud and securities law violations to the SEC. If you would like to speak to Eric L. Young or another SEC whistleblower attorney, please call 1-800-590-4116 or complete our contact form.