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: