5 big wealth management regulatory trends in 2024

AI-washing, elder fraud, reg rollback: 5 big compliance trends in 2024

December 24, 2024 2:08 PM

For wealth managers who think regulators have been a tad overbearing for the past few years, the end of 2024 is likely bringing a sigh of relief.

Securities Exchange Commission Chair Gary Gensler capped off his momentous run as Wall Street's top watchdog with the biggest penalty haul in the agency's history. The SEC reported in November that it brought in a record $8.2 billion in financial remedies in its previous fiscal year.

As had previously been the case, much of the haul came from enforcement actions against cryptocurrency firms. In fact, in the SEC's fiscal 2024, a full $4.5 billion came from regulators' case against Terraform Labs, a now defunct cryptocurrency firm, and its founder, Do Kwon.

But crypto was far from the only story. Regulators pursued cases cracking down on alleged bogus claims about artificial intelligence and similar technologies and firms' failures to track and record their advisors' business-related communications. Plaintiffs lawyers also stayed busy filing cases accusing firms of doing too little to protect elderly clients from fraud and to make sure investors are receiving fair returns on cash held in "sweeps" accounts.

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Amid it all, serious questions have arisen over whether regulators have at times been overstepping their remit. A milestone Supreme Court case greatly curtailed the SEC's ability to handle disciplinary cases internally without having recourse to the court system. Building on that decision, a series of other cases seek to undermine the very foundations of the Financial Industry Regulatory Authority, the broker-dealer industry's self-appointed regulator.

With Donald Trump returning to The White House next month, expectations are that deregulation will be the order of the day. But before coming to that point, it's worth taking a look back at what regulators did in the previous year.

Scroll down for our list of some of the biggest cases and trends affecting wealth management regulation in 2024.AI-washing, elder fraud, reg rollback: 5 big compliance trends in 2024

Hanging out the ‘washing’

One of regulators' big priorities in recent years has been to make sure wealth managers can actually back up claims they make in advertisements or other widely broadcast communications.

An SEC marketing rule that took effect in November 2022 calls on advisors to make sure that any message contains no investment-related statements that can't be substantiated with independent facts. Regulators have since been kept busy policing firms' claims.

One priority could be lumped into the category of "washing" cases — a reference to "whitewashing," or avoiding discussing certain inconvenient facts by simply skipping over them. Gensler cautioned firms in early 2024 to not engage in a practice he called "AI-washing," or making tech-related claims they couldn't back up.

The SEC showed in March it wasn't an idle warning. Regulators reached a $400,000 settlement with a pair of advisory outfits over their claims about their use of AI, machine learning and similar systems in dispensing investment advice. In reality, according to the SEC, the firms were relying on technology that differed little from standard roboadvisors.

AI-washing wasn't the only kind of washing that concerned the SEC. Regulators have also warned about "green-washing" — or making bogus claims about the environmental benefits of certain investing strategies.

In November, the SEC hit the investment management firm Invesco with a $17.5 million settlement over claims it made related to so-called ESG investing. ESG — which stands for environmental, social and governance — generally refers to the idea that investors should be able to use their money to further certain causes beyond chasing basic returns.

Sweeping allegations

One of the biggest legal developments in the wealth management industry this year was an avalanche of lawsuits over firms' alleged failure to secure fair returns on cash investors have sitting in brokerage accounts.

It all started in June when Morgan Stanley was hit with a lawsuit questioning why it was paying interest at a rate as low as 0.01% on certain of its accounts. The legal scrutiny has gone on to fall on virtually every big-name firm in the business, including Wells Fargo, Ameriprise, LPL Financial, Schwab, UBS and Raymond James.

These suits, all of which seek class-action status on behalf of a large group of allegedly harmed investors, make the same basic contention: That firms are making a killing by lending out uninvested brokerage cash through affiliated and unaffiliated banks and providing too little of the resulting returns to clients.

Regulators have also taken interest. Morgan Stanley, LPL, Wells Fargo and Bank of America — the parent of Merrill — have revealed in filings that they have been responding to SEC inquiries into their sweeps policies.

Elder fraud remains a plague

Elder fraud has been called the "crime of the century" many times, and for good reason.

A pair of lawsuits filed against Charles Schwab purport to lift the veil on some of the unsettling practices that deprive thousands of seniors of billions in retirement savings every year. The cases also raise serious questions about what wealth managers should be doing to prevent the plague of elder fraud.

In one lawsuit against Charles Schwab, the firm was accused of doing virtually nothing to prevent a 92-year-old client from converting $278,000 held in Schwab accounts into gold bars and handing them over to fraudsters. A separate suit accused Schwab and Bank of America of similarly standing idly by while an elderly couple converted $18.5 million in savings into crypto payments that eventually went to bad actors.

Bloomberg has likewise reported in August on an 83-year-old woman whose accounts were drained by scammers despite her having relationships with JPMorgan, Bank of America, Wells Fargo, Citi and various other large institutions.

Underreporting makes the true extent of elder fraud difficult to measure. The AARP has estimated last year that $28.3 billion is stolen from people 60 and over every year.

The North American Securities Administrators Association, which represents state and provincial regulators, reported in October that it had started 1,305 investigations and filed 131 enforcement actions in the previous year in cases alleging harm against 2,869 older investors.

Regulatory rollback

One of many landmark decisions the U.S. Supreme Court handed down this year came in June in SEC v. Jarkesy.

At issue in Jarkesy was the SEC's reliance on in-house tribunals known as administrative law judges, or ALJs, to mete out punishments in fraud cases. George Jarkesy, a former hedge fund manager, was ordered by an SEC internal adjudicator to pay nearly $1 million in civil penalties and disgorgement over alleged misstatements related to a pair of funds he was managing. Jarkesy argued the ALJ's decision deprived him of his Seventh Amendment right to a jury trial.

When a majority of U.S. Supreme Court justices agreed this summer, their decision not only brought to halt the SEC's ability to rely on ALJs in fraud cases; it also raised questions about the ability of other regulatory bodies to resolve compliance matters outside the regular court system.

FINRA in particular has become the subject of several lawsuits asking if previous penalties it has handed down using internal procedures shouldn't be retroactively erased in light of the Jarkesy decision. FINRA separately suffered a blow in November when a federal appeals court ruled it had been overstepping its authority by "unilaterally" expelling brokerage firms from the industry.

With Trump returning to power in less than a month, the questions about regulators' powers are only likely to intensify.

Off-channel still off limits

Once again, some of the biggest fines handed out by regulators were over firms' alleged failures to track and record advisors' business-related messages.

The SEC and its companion regulator, the Commodities and Futures Trading Commission, have so far handed down more than $3 billion in fines for violations with so-called "off channel" communications. As in previous years, the firms charged with monitoring and tracking failures included many household names.

In August, the SEC reached a nearly $393 million settlement with Ameriprise, Edward Jones, LPL Financial, Raymond James, BNY Pershing, RBC Capital Markets and other firms over alleged off-channel communication failures. A month later, regulators hit Stifel, Invesco and other firms with roughly $88 million in penalties over similar alleged violations.

The zealous enforcement has prompted some pushback from the industry. In June, the trade and lobbying group American Securities Association filed a lawsuit seeking to pry out of the SEC the exact methods it uses for setting penalty amounts in off-channel cases.

Questions have also come from inside the SEC itself. Commissioners Hester Peirce and Mark Uyeda — Republican appointees with a history of accusing regulators of overreach — responded to the latest round of off-channel penalties by questioning if the rules were too strict for even well-intentioned firms to comply.

Such voices are likely to become only louder in the next administration.