PLANADVISER - November/December 2017 - 64

compliance consult
SEC Investor
And Cyber Initiatives
The priorities of two new programs
ON SEPTEMBER 25, the Division of Enforcement at the
Securities and Exchange Commission (SEC) announced the
creation of two new groups: the Retail Strategy Task Force
and a cyber unit. On October 26, the co-director of the Division
of Enforcement, Stephanie Avakian, discussed the
respective missions of the two groups during her keynote
speech at the Securities Enforcement Forum in Washington,
D.C.
The focus of the task force will be on interactions within
the retail market, which the SEC broadly views as the " intersection
of investment professionals and retail investors. "
In the retail space, the SEC continues to have concerns
about certain practices that it views as contributing to two
broad areas of misconduct: charging fees that are inadequately
disclosed and recommending or trading in products
and strategies that are plainly inappropriate under the
circumstances. The task force will focus on practices in
these areas including:
* Steering investors to share classes with higher fees
when lower-fee share classes are available;
* Abusive practices in wrap-fee accounts such as failing
to disclose the costs of trading through unaffiliated brokers
and purchasing investment products that generate additional
fees;
* Recommending that an investor buy and hold products
in his account, including in a retirement account, that are
clearly inappropriate for a long-term, buy-and-hold strategy,
e.g., inverse exchange-traded funds (ETFs);
* Selling structured products without adequately
disclosing fees and markups, which reduce returns; and
* Abusive practices such as churning that generate large
commissions.
Notably, these compliance areas are not new territory
for the SEC. In fact, the agency has repeatedly brought
enforcement actions against advisers for engaging in such
practices. As a result of the task force's efforts-which will
include the use of data analytics and other resources-the
SEC is poised to greatly enhance and expand its investigative
and enforcement activities, and to extend even greater
scrutiny to advisers and other regulated parties.
The SEC's other new initiative is the creation of the cyber
unit, which is tasked with addressing concerns raised by the
increasing use of technology by investors and advisers, as
well as the growing risk of market manipulation and other
investor harm. The cyber unit will comprise SEC staff with
expertise and experience in cyber issues.
Clearly, the creation of the dedicated unit signals that the
SEC has a growing appreciation of the potential risks associated
with cyber issues. Its concerns include the following:
* The use of technology to gain an unlawful market
advantage, e.g., hacking to access material, nonpublic information,
hacking of accounts in order to conduct manipulative
trading, and disseminating false information through
electronic publication;
* The failure by registrants to adequately secure
customer data and ensure system integrity; and
* The failure by a public company to disclose, or
adequately disclose, cybersecurity incidents that occur at
the company.
Notably, the SEC has also articulated concerns with
respect to the use of blockchain technology, which is the
bedrock technology for virtual currencies and for transactions
involving such currencies-e.g., initial coin offerings.
At the moment, the regulatory implications with respect to
blockchain technology and virtual currencies are generally
unclear. However, with the assistance of the cyber unit, it
is likely that additional clarity-at least on the part of the
SEC-is forthcoming.
With the creation of the cyber unit, advisers should
expect additional regulatory and enforcement activity as
the SEC renews its focus in this area.
There are open questions as to how the new initiatives
will affect the SEC's existing efforts, including its collaboration
with other regulators. For example, it is working on
the creation of a uniform fiduciary standard, reportedly in
consultation with the Department of Labor (DOL). While
this joint effort is still in the works, the DOL has signaled
that it will move forward with its investment advice regulation
and related exemptions. In this regard, it is becoming
increasingly likely that the DOL's rulemaking, when it
eventually becomes fully applicable, will be significantly
different than as originally drafted and could perhaps also
be influenced by its interactions with the SEC.
While the regulatory framework is a work in progress,
many plan sponsors and their advisers, to their credit,
are beginning to consider the importance of protecting
Employee Retirement Income Security Act (ERISA) plan
participant data.
David Kaleda is a principal in the fiduciary responsibility practice
group at Groom Law Group, Chartered, in Washington, D.C. He has
an extensive background in the financial services sector. His range of
experience includes handling fiduciary matters affecting investment
managers, advisers,
broker/dealers,
insurers, banks and service
providers. He served on the Department of Labor's Employee Retirement
Income Security Act Advisory Council from 2012 through 2014.
64 | planadviser.com november-december 2017 Art by Tim Bower
http://www.planadviser.com
PLANADVISER - November/December 2017

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