U.S. SEC set to take aim at costly mutual funds, bad brokers

Wed Jul 16, 2014 4:06pm EDT
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By Suzanne Barlyn

(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.   Continued...

The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011.   REUTERS/Jonathan Ernst