SEC Focuses on Increased Scrutiny for Hybrid Firms in 2024 Examination Priorities

Posted on November 15th, 2023 at 1:16 PM
SEC Focuses on Increased Scrutiny for Hybrid Firms in 2024 Examination Priorities

From the desk of Jim Eccleston at Eccleston Law 

As the ranks of hybrid advisor-brokers, registered with both the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), continue to grow, regulators are intensifying their scrutiny.

According to AdvisorHub, in the coming year, SEC examiners will shift their focus to the economic incentives and conflicts of interest associated with advisers who are dually registered as broker-dealers, utilize affiliated firms to provide client services, and have financial professionals catering to both brokerage customers and advisory clients, as stated in the report. Examiners will actively search for instances where these dual registrants recommend investments, proprietary products, and affiliated service providers to clients, even when lower-cost alternatives are available.

At FINRA's annual conference, officials expressed their interest in compliance violations by dual registrants. Chris Kelly, who served as the interim head of enforcement at FINRA, pointed out that some hybrid advisors exploit their dual status to maximize the fees and commissions they receive from customers. He highlighted what he termed the "BD-IA arbitrage," wherein hybrids sell high-commission products in a brokerage account and promptly convert them into an advisory account with an annual fee.

 

Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.

Tags: eccleston, eccleston law, sec

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