Investors

1. Conflicts are Avoided or, When Appropriate, Disclosed

The SEC fined a regional advisory firm this month for selling investments without proper disclosure and raising questions about whether the investments were made for the benefit of the advisors, instead of the investors.  It’s, unfortunately, a reminder that recommendations to seniors, retirees or other vulnerable investors should be carefully reviewed.  If you are considering a new compliance notice – this is a good case to distribute. Read on to understand how a sustainable governance approach can protect investors – especially as one considers the Securities and Exchange Commission’s (SEC) Regulation Best Interest.

On Sept. 14, 2018 the SEC charged Indianapolis-based investment advisory firm Steele Financial Inc and its sole owner Tamara Steele with selling approximately $13 million of high-risk securities to more than 120 advisory clients, many of whom are current or former teachers or other workers in public education, without disclosing that she and her firm stood to receive commissions of up to 18 percent from the sales.

The SEC alleges that between December 2012 and October 2016 Steele Financial Inc. and Tamara Steele sold to advisory clients and other investors more than $15 million of the securities of Behavioral Recognition Systems Inc. (BRS), a private company previously charged with fraud by the SEC.  Ms. Steele and Steele Financial received commissions of cash and warrants from BRS that were worth more than $2.5 million.  Steele and Steele Financial allegedly targeted their own advisory clients who generally did not invest in individual stocks, selling more than 120 clients approximately $13 million of BRS securities without disclosing that the defendants were receiving commissions from BRS.  The complaint further alleges that the defendants created false invoices and took other steps to conceal their involvement in selling BRS securities. The SEC stated it believed that Ms. Steele took advantage of her clientele including “clients whom she herself described as ‘two-pension, two Social Security families.”

Many conflicts of interest can be mitigated with disclosure.  In other situations, such as with the Steele Financial case, disclosure may not be adequate. Compliance should help the business review compensation incentives to avoid conflicts and allow a business to grow sustainably and serve its clients.

2. Technology is Used to Eliminate or Minimize Bias

I recently interviewed Jasmin Sethi, a veteran legal and compliance expert with a history at the SEC and Blackrock, and now her own fintech company, for insights about the power of technology to mitigate bias in investment recommendations and Regulation Best Interest.

We discussed the arguably thin, but crucial, line between screening investment recommendations against the current “reasonable basis” standard for broker-dealers and the standard proposed under Regulation Best Interest.  We also discussed the tremendous opportunity to manage or avoid conflicts of interest by using technology. For instance, compliance officers can help the business calibrate algorithms, portfolio modeling tools and other financial analysis tools to ensure they operate as intended providing objective investment analysis.

3. Regulatory Priorities, Economic Trends, and Industry Developments Are Proactively Considered

Please listen to my third podcast to hear a thought leader share her insights. It will help you develop your strategic approach for this important issue that is likely to lead to new regulatory requirements. It will also help you confirm your governance and incentives are designed to avoid situations like that experienced by Steele Financial.

For more on how you can take steps to protect your investors, check out my book, Triple Bottom-Line Compliance: How to Deliver Protection, Productivity and Impact.