Under Advisement: SEC Scrutinizes Wealth Management Industry

by Cadwalader, Wickersham & Taft LLP

Cadwalader, Wickersham & Taft LLP

Recent events have made it clear that there is an increased regulatory focus on the conduct of investment professionals in the wealth-management industry.  The Securities and Exchange Commission (“SEC”) in particular has emphasized that certain activities by investment advisers directly impacting retail investors, such as inadequate fee disclosure, dubious sales practices and inappropriate steering to unsuitable strategies and products, is a top enforcement priority under the leadership of SEC Chairman Jay Clayton.  In the last year and a half, the Enforcement Division has resolved a number of actions against leading financial institutions over allegations of inadequately disclosed fees and improper investment recommendations.  The Division has demonstrated through these actions that it is particularly focused on:

  • steering clients to higher-cost products, such as mutual-fund share classes charging higher fees and commissions;
  • abuses in wrap-fee accounts;
  • investment-adviser recommendations to buy and hold highly volatile products like inverse exchange-traded funds;
  • suitability issues involving the sale of structured products to retail investors; and
  • abusive sales practices like churning and excessive trading.

The SEC has also made a series of announcements aimed at addressing misconduct by investment professionals in their dealings with retail investors.  In September 2017, the Division announced the formation of a Retail Strategy Task Force to develop targeted initiatives and collaborate with others in the SEC, including the Office of Compliance Inspections and Examinations (“OCIE”), to identify and address misconduct impacting retail investors.  OCIE, in turn, has said that examinations this year will focus on firms that have practices or business models that may create increased risks that investors will pay fees, expenses, or other charges that are inadequately disclosed.  This includes firms that provide financial incentives to advisory personnel who favor particular in-house products or investments with higher fees without proper disclosure.  To date, we have not seen any enforcement actions directly attributable to the work of the Task Force.

On February 12, 2018, the Division launched the Share Class Selection Disclosure (“SCSD”) Initiative, a four-month self-reporting initiative with favorable settlement terms aimed at investment advisers who, without appropriate justification, put their clients into higher-fee mutual-fund share classes when lower- or no-fee classes were available.  Although the Division will  recommend settlements that do not impose civil monetary penalties for eligible advisers that participate in the SCSD Initiative, the Division has made no assurances that individuals associated with eligible advisers will receive preferential settlement terms.  Moreover, the Division may recommend stronger sanctions against advisers that engaged in misconduct but failed to self-report.

Earlier this month, Wells Fargo & Company disclosed that it is conducting a review of certain activities within its Wealth and Investment Management division in response to federal inquiries.  The areas that Wells Fargo is reviewing, and the likely focus of the federal inquiries, include whether there have been inappropriate referrals or recommendations, including with respect to rollovers for 401(k) plan participants, certain alternative investments, or referrals of brokerage customers to the investment and fiduciary-services business.  Given the SEC’s focus on this area of activity, it is likely that its inquiries will encompass the wealth-management businesses of other financial institutions.

The SEC’s focus on the sales practices of financial institutions has not been limited to retail investors.  In February 2018, it commenced an action against Deutsche Bank Securities, Inc., for allegedly misleading statements made by its traders and salespeople while negotiating the sale of commercial mortgage-backed securities.  Similar to the well-known issues involving former Jefferies, Inc. trader Jessie Litvak, the allegations concern misstatements by traders to potential counterparties regarding the prices at which Deutsche Bank had originally purchased them.  This is the SEC’s third enforcement action of this type, in addition to related criminal prosecutions.

The Chief of the Enforcement Division’s Complex Financial Unit recently reiterated that misrepresentations in the sale of complex products will continue to be a focus for the Division.  He also stated that a new area for concern for the SEC is cross-trading activity in a number of asset classes that improperly provides an advantage to one client over another, and that the Enforcement Division was using data analytics to identify activity that warranted further scrutiny.

Despite some predictions to the contrary, this activity shows that the SEC continues to focus on financial institutions under its current leadership, particularly in the wealth-management area.  Given the heightened focus on adviser conduct impacting retail consumers – particularly on conflicts of interest relating to higher-cost investments and sales practices in general – wealth-management firms should carefully review their policies and practices to ensure they adequately instruct advisory personnel to disclose any conflicts of interest and incentivize them to recommend the best deal for their clients, and revisit any training program for advisory personnel.  Firms within the SEC’s heightened focus should consider developing action plans or taking further pre-emptive actions, such as performing an independent risk assessment and conducting robust mandatory training programs if they believe they may have potential issues, to better prepare for a possible enforcement inquiry from the SEC or other applicable regulator.


1   See e.g., SEC Charges Ameriprise With Overcharging Retirement Account Customers for Mutual Fund Shares; SunTrust Charged With Improperly Recommending Higher-Fee Mutual Funds.

2   See e.g., Two Firms Charged With Compliance Failures in Wrap Fee Programs.

3   See e.g., Morgan Stanley Settles Charges Related to ETF Investments.

4   See e.g., SEC Charges UBS With Supervisory Failures in Sale of Complex Products to Retail Investors.

5   See e.g., SEC Detects Brokers Defrauding Customers.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Cadwalader, Wickersham & Taft LLP | Attorney Advertising

Written by:

Cadwalader, Wickersham & Taft LLP

Cadwalader, Wickersham & Taft LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.