SEC intensifies scrutiny of fee-based accounts and reverse churning

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 monito...