(Reuters) - A U.S. Securities and Exchange Commission official offered a sneak peek on plans for examining brokerages in 2015, indicating it would likely focus on sales of expensive mutual funds and have a “laser like focus” on problem brokers and firms.
The SEC is in the midst of determining its so-called “examination priorities” for next year, said Kevin Goodman, who heads the broker-dealer examination program for the SEC’s Office of Compliance Inspections and Examinations.
SEC officials from around the U.S. will meet in Washington this month to further discuss their concerns about the brokerage industry, Goodman said in New York on Tuesday to a group of securities industry compliance professionals. The agency is also analyzing industry data for other trends.
SEC examiners routinely check up on brokerage and investment advisory firms to see if they are complying with industry rules. Efforts by agency officials in the coming weeks will lead to the publication of a formal list of 2015 examination priorities in January, said Goodman.
A preliminary version of those priorities, however, is taking shape, Goodman said.
One issue of concern was brokerages that sell pricey share classes of mutual funds and variable annuities. Goodman cited “an explosion” of so-called “L-shares,” a type of mutual fund shares held in variable annuities that have short surrender periods, but higher upfront costs. A surrender period is the number of years that investors must wait in order to withdraw money from an annuity, or cash it in without a penalty. It is often seven years, but can be three or four years for L-shares, according to marketing literature.
The SEC was interested to know whether investors were aware of the fees they pay for different types of share classes and whether these charges were appropriate for the investors buying them, Goodman said.
“We want to make sure these share classes aren’t being chosen or marketed based on the higher commissions they generate,” Goodman said.
Goodman’s unit was also considering ramping up its focus on brokerage firm branch offices. The SEC has long examined the goings-on at branch offices, but typically in a broader context, that has focused on how well firms were supervising those branches, Goodman told Reuters after his remarks.
But the agency may decide to look at individual branch offices on a standalone basis next year. If finalized, examiners would choose those offices based on factors such as their size, trading activities, and sales in certain products, such as an unusual amount of risky complex securities, Goodman said.
The industry can also expect a “laser like focus” on brokerages and brokers who have a history of disciplinary violations.
“We want to target firms that seem to be homes for problematic (brokers),” Goodman said.
(This version of the story was refiled to change “peak” to “peek” in the first paragraph.)
Reporting by Suzanne Barlyn; Editing by Bernadette Baum