Advisors hoping that the Securities and Exchange Commission’s Share Class Selection Disclosure (SCSD) Initiative marked the end of regulators’ diligent trolling of their fee and revenue arrangements may be in for a shock.

The SEC is hailing the initiative as a success. After all, it successfully collected $125 million from 80 registered investment advisors that self-reported 12(b)1 fees, which mutual funds pay to advisors to incent mutual fund marketing.

But instead of the SCSS initiative being the conclusion of the SEC’s investigation, it may be the beginning of a robust spate of legal complaints and a possible new initiative—this time zeroing in on RIA revenue-sharing activity, industry attorneys said.

Raising the most concerns about what comes next is the agency’s complaint against Commonwealth, which charges the $85 billion Boston-based independent broker-dealer/RIA with allegedly violating their fiduciary duty to clients by accepting and failing to adequately disclose some $177 million in revenue-sharing payments.

The payments were received from its clearing broker-dealer National Financial Services NFS, LLC, an affiliate of Fidelity Investments, which Commonwealth has required most of its advisors to use for trades since at least 2007.

“Regardless of the outcome of this case, revenue sharing-related inquiries are likely to be front and center in SEC exams – and enforcement cases – for the foreseeable future,” Investment Advisor Association General Counsel Gail Bernstein said in a column sent out tens of thousands of RIAs late last week. IAA is a not-for-profit trade group that represents SEC-registered investment advisors that cumulatively manage more than $25 trillion in assets.

“Advisors would do well to take a close look at their processes for identifying and disclosing the conflicts associated with those arrangements, including with respect to updating and ensuring consistency among the relevant disclosures,” Bernstein added.

In its request for a jury trial in federal district court in Massachusetts, the SEC said:

“These revenue-sharing amounts that Commonwealth received from NFS were sufficient to create meaningful incentives to invest clients' assets in share classes and mutual funds that were more expensive for clients, and more profitable for Commonwealth. Thus, Commonwealth had actual, not merely 'potential,' conflicts.”

Commonwealth spokeswoman Jacquelyn Marchand told Financial Advisor magazine the firm denies the allegations. “While the enforcement action proposed by the Securities and Exchange Commission is a pending legal matter, Commonwealth Financial Network vehemently denies the allegations and believes they are categorically without merit. We are confident we have operated both appropriately and justly and will vigorously defend our actions in this matter,” Marchand said.

Still, the complaint against the $85 billion IBD with over 300,000 clients is notable in several respects not least of which is the risks and benefits of self reporting, Bernstein said. “First, the adviser self-reported to and settled with the SEC under the SCSD Initiative,” Bernstein said.

The SEC’s Division of Enforcement warned at the time it announced the initiative that it would recommend stricter penalties for advisers that were eligible to participate in the program, but did not self-report. It also warned that an enforcement action could be taken if other potential misconduct was uncovered.

“This complaint appears to confirm these warnings and suggests that advisors that self-reported likely received no leniency in connection with conduct outside of the four corners of the Initiative,” Bernstein said.

In fact, the SEC’s Division of Enforcement has sent requests to firms–including those that have self-reported – seeking documents and data regarding their revenue sharing practices and disclosures securities attorneys have told the IAA, Bernstein said.

“As this case unfolds, it will be interesting to learn whether there was a relationship between the advisor’s self-reporting under the SCSD Initiative and the investigation relating to the advisor’s revenue sharing and whether any conclusions can be gleaned about the potential benefits and risks of participating – or declining to participate – in a voluntary self-reporting initiative,” she said.

What is more certain is the complaint is a clear signal of the SEC’s expectations around disclosure of revenue sharing arrangements and the incentives they create for B-Ds and advisors.

While RIAs have used the word “may” to disclose potential conflicts of interest for years, that may no longer work, Bernstein said. 

“It ‘may’ not be enough for an advisor simply to remove the word ‘may” from its disclosures, and it 'may’ not be enough to have policies that require identification and disclosure of conflicts unless the advisor also adopts and implements procedures that are sufficiently specific to connect the identification of the conflicts to their adequate disclosure.

Commonwealth initially disclosed in its Form ADV brochure that a portion of a fee paid to the firm’s clearing broker by mutual funds that participated in one of the adviser’s programs “is” – not “may be” – shared with the advisor. But this disclosure, in the SEC’s view, did not go nearly far enough.

According to the SEC, the disclosure did not sufficiently describe the circumstances under which payments were received or state that different funds or share classes were more or less expensive. As a result, the SEC said the conflicts of interest presented by this set of circumstances were allegedly not disclosed.

Commonwealth later amended its disclosures to state that these circumstances “could present a potential conflict” because the advisor “may have an incentive” to recommend investments that compensate the advisor. But the SEC’s complaint alleged that this amended disclosure is “still deficient and misleading” because of the words “potential” and “may.”

The SEC enforcement division now seems to be moving onto a second, more “expansive” phase of “regulating without rules,’ which could reach even more investment advisors and firms, Financial Services Institute’s General Counsel David Bellaire said.

SEC enforcement staff “could not cite a clear rule or regulation that had been violated” in its SCSD iniative, FSI maintains. “Instead, the SEC relied on previous settlements and past published guidance (which are statements of the staff’s view on a topic at a given time) to squeeze settlements from businesses,” the trade group representing the brokerage industry said in a release kicking off its #RegsWithoutRules reform campaign against the nation’s top securities cop late last week.