SEC ‘Sweeps’ Find Problems at Small Investment Firms

The Securities and Exchange Commission’s first “sweeps” of small financial planners found widespread failure to disclose potential conflicts of interest, disciplinary histories and other background information to customers, an SEC official said today.

The sweeps, or coordinated examinations of 280 firms in 10 states, also showed numerous record-keeping lapses, including errors in client contracts and fee and investment documents, said Lori Richards, SEC director of compliance inspections and examinations.

“This segment of the investment-advisor industry clearly needs to be examined more frequently than it has been,” Richards said. “The lack of regulation over them is frightening.”

A handful of possible fraud cases were referred for further investigation, she said. One planner allegedly inflated a client’s investment returns in an apparent attempt to impress the customer, who also was a family member, she said.

The SEC initiated the sweeps out of concern that small financial planners--those that manage less than $25 million in customer assets--are typically examined only once every 44 years, Richards said.

Regulators sent deficiency letters to offenders, giving them 30 days to correct the violations of federal and state rules.

The sweeps, by the SEC and state regulators between June 1995 and September 1996, found:

* Fifty-one percent of the firms violated SEC or state requirements by not properly disclosing their qualifications, experience, compensation, client base, disciplinary histories, or other background information. Planners must provide this information to customers before any agreement is signed.

* Thirty-nine percent didn’t properly keep basic records of potential interest to clients, including fees and commissions received, investment returns, and customer contracts.

* Five firms may have committed fraud, embezzlement or misrepresentation.

States covered in the sweeps were Texas, Pennsylvania, Maryland, Virginia, Wisconsin, Nevada, Nebraska, Minnesota, Washington and Iowa. Some violations were minor deficiencies reflecting more “a lack of knowledge rather than an intent to defraud,” Richards said. Regulators’ plans to conduct more exams will help inform these planners, she said.