SEC intensifies scrutiny of fee-based accounts and reverse churning

Abstract

Purpose

To explain the SEC's focus on the appropriate use of fee-based accounts and disciplinary efforts to identify and prevent “reverse churning.”

Design/methodology/approach

Describes the quantitative analytics used in the SEC's Risk Analysis Examinations (RAEs) to identify reverse churning and other problematic behaviors, explains why the inappropriate use of fee-based or “wrap fee” accounts and “double charging” can be unfair to investment clients, summarizes prior NASD and FINRA guidance and enforcement regarding fee-based account supervision, and recommends account monitoring actions that firms should take to ferret out reverse churning.

Findings

The SEC's continuing interest in reverse churning and double-charging, and its use of new examination and investigation tools, together suggest that the future will see more investigations and enforcement actions against firms who place clients in a fee-based or “wrap-fee” account without having adequate supervisory procedures to determine and monitor whether such accounts are appropriate for those clients.

Practical implications

Monitoring accounts to ferret out reverse churning has proven difficult for firms in the past, since spotting inactivity might be more challenging than detecting excessive trades (known as “churning”). However, it seems that the SEC and its staff are enhancing their ability to identify and address these violations.

Originality/value

Practical advice from experienced financial services lawyers.

Citation

A. Nathan, D. and A. Navarro, L. (2014), "SEC intensifies scrutiny of fee-based accounts and reverse churning", Journal of Investment Compliance, Vol. 15 No. 1, pp. 48-51. https://doi.org/10.1108/JOIC-01-2014-0009