If your firm ever offers investments or recommendations that cost clients more than similar options in the marketplace, you’ll no longer be able to disclose that you “may” push pricier options—you will have to tell clients in writing that you “will” pursue sales or a strategy that costs them more.

That’s the takeaway from ongoing Securities and Exchange Commission and Financial Industry Regulatory Authority disclosure initiatives and examinations, said Fred Reish, a partner at law firm Drinker Biddle, in an interview with Financial Advisor.

The ongoing initiatives are aimed at curbing higher sales commissions and fees. These initiatives apply to the bulk of the industry—particularly to advisor representatives dually registered as advisors and brokers who sell products to earn commissions. But retirement plan rollover recommendations from fee-only RIAs are also under the microscope.

“Anywhere advisors will make more money by selecting investments that cost more, there has to be disclosure that tells investors the firm will sell them pricier products and what the impact may be,” Reish said.

“The SEC is becoming more aggressive on conflicts of interest,” Reish said. “A good example of that is the [SEC’s] voluntary share class selection disclosure initiative, which not only required advisors to tell investors they ‘will’ sell them 12b-1 shares, but also mandated advisors disgorge all of the 12b-1 fees they accepted.”

As part of the initiative, the SEC settled charges against 79 investment advisors who will return more than $125 million to clients. By far, most of those funds will go to refund retail investors.

SEC Chairman Jay Clayton told a recent gathering of compliance executives in early April that he expects investor refunds stemming from the initiative to continue “for a long time.”

Specifically, the SEC’s orders found that investment advisors placed their clients in mutual fund share classes that charged 12b-1 fees—recurring fees deducted from the fund’s assets—when lower-cost share classes of the same funds were available to those clients. The advisors did not adequately disclose that the higher-cost share classes would be selected.

To further turn up the heat, regulators are also mandating that advisors obtain informed consent from investors, who must acknowledge they understand they’re being sold more expensive products and/or are being advised to pursue retirement rollover strategies when less costly options exist.

According to Reish, advisors are also being asked during SEC exams to provide any written disclosures and sales scripts they’ve used during the past six months on the following topics:

  1. Client distribution options (these are the options the client has to maintain assets in a former employer’s plan, to transfer assets to a new employer’s plan, to roll assets over to an IRA, or to take a lump-sum distribution). The disclosures must also involve the tax implications of those options, and other considerations;
  2. Conflicts of interest or financial interests that firms or their reps have in recommending any specific product or account type;
  3. Various types of account options available to clients (i.e., IRA rollovers), including the account-level fees and expenses and services provided.

These themes are also rampant in the SEC’s ReTIRE (Retirement-Targeted Industry Review) Initiative, which looks hard at advisors’ rollover recommendations and the fees and commissions associated with them. The focus, the SEC said, is “on higher-risk areas of registrants’ sales, investment, and oversight processes, with particular emphasis on select areas where retail investors saving for retirement may be harmed.”

Specifically, the ReTIRE initiative is designed to ferret out:

Finra is also looking hard at fees and conflicts of interest in its emphasis on rollovers during exams and with its voluntary 529 plan disclosure initiative, Reish said.

In Reish’s example, someone planning to save for many years for a young child's eventual college expenses would almost certainly be better off with class A shares, which typically involve an up-front sales charge, or load, while class C shares often involve ongoing annual loads.

Finra’s crackdown is particularly timely because the Tax Cuts and Jobs Act of 2017 opened up 529 education savings plans to allow distributions to be used for tuition from kindergarten through the 12th grade.

According to Finra, “Some firms have failed to reasonably supervise brokers’ recommendations of multi-share class products.” Specifically, the agency believes there have been suitability violations related to brokers recommending 529 plan share classes that were inconsistent with the accounts’ investment objectives and were, therefore, unsuitable for the investors.

While regulators keep up the heat, the news is making its way into the mainstream media. As one daily Chicago newspaper headline screamed this week: “Is your advisor steering you into [a] fee-heavy 529 plan?"