SEC chair vows aggressive action against advisors who fleece teachers, service members

The head of the SEC is promising rigorous enforcement against unscrupulous advisors and brokers who take advantage of teachers and military service members — emerging areas of focus for the commission as it looks to crack down on bad actors who prey on retail investors.

"My message here is simple," Jay Clayton told members of the Senate Banking Committee in a hearing, in prepared remarks Tuesday. "If you're ripping off teachers, service members or veterans, we want to catch you, punish you and get them their money back."

But the SEC chairman took sharp hits from Senate Democrats on the committee, who asserted that Clayton, for all his talk of protecting Main Street investors is pursuing a regulatory agenda that often favors Wall Street firms and corporate interests.

Those criticisms were primarily focused on the SEC's Regulation Best Interest and the looming changes to the rules governing proxy advisors.

On protecting teachers and current and former members of the military, however, there was no pushback. Clayton's testimony comes as the SEC appears to be advancing a June initiative to evaluate how advisors, brokers and administrators who work with plans that cater to teachers and public-sector workers are managing conflicts of interest and ensuring that such clients don’t overpay for high-cost annuities or other retirement products.

Securities attorneys have been issuing client notices reporting that SEC regional offices have been approaching advisors and brokers with requests for documents concerning their work with 403(b) and 457(b) plans.

"Broadly speaking, we are looking at the compensation and sales practices of third-party administrators of teacher retirement plans — often known as 403(b) plans — as well as the practices of their affiliated advisors and broker-dealers," Stephanie Avakian, the SEC's co-director of enforcement, said in a speech last month in London.

James Lundy and Fred Reish, attorneys with the law firm Drinker Biddle, noted in a recent blog post that the SEC has identified concerns with public-sector retirement in the past, and point to Clayton's recent comment that "teachers and military folks hold a special place in all our hearts at the SEC" as an indication that the commission "will pursue this particular sweep aggressively."

“Scrutiny of retirement plans that cater to teachers and other public-sector workers could become "the next focus area for SEC Chairman Jay Clayton's continuing prioritization of issues impacting 'Main Street' and retirees," they wrote.

But in the hearing, critics contended that the latest enforcement efforts, while a welcome development, are still overshadowed by what they view as a concession to Wall Street in the form of Reg BI.

"While I appreciate the Enforcement Division's initiatives, including those to protect teachers and military service members from fraud and misconduct in financial advice, you've done so much damage by adopting what you call Regulation Best Interest," said Sherrod Brown of Ohio, ranking Democrat on the Banking Committee.

As he has in the past, Clayton defended Reg BI for striking a balance between mandating stronger disclosure requirements and refraining from heavy-handed regulation that could curtail investor choice in the cause of bringing "long overdue regulatory rationality and clarity to this important area."

Brown accused Clayton of "taking Wall Street's side over and over instead of standing with investors," and of undermining Congress' intent in passing the Dodd-Frank Wall Street Reform and Consumer Protection Act, which directed the SEC to consider harmonizing the rules for investment advisors and broker-dealers.

"You could have simply followed Congress' guidance in Dodd-Frank to create a uniform fiduciary standard for brokers and advisors, which would be the best way to give investor confidence that their interest comes first," Brown said. "But you didn't do that."