SEC and FINRA Expands Initiative to Require Investment Advisers and Brokers to Fully Disclose Their Sales Strategies

Posted on April 24th, 2019 at 5:01 PM
SEC and FINRA Expands Initiative to Require Investment Advisers and Brokers to Fully Disclose Their Sales Strategies

From the Desk of Jim Eccleston at Eccleston Law LLC:

According to the SEC’s disclosure initiatives and examinations, the agency is aiming to require investment advisers to obtain informed consent from their clients by having them acknowledge that they were not sold the least expensive product and that less costly options exist. The SEC’s initiative applies specifically to fee-only RIAs and dully registered investment advisers who sell products to earn commissions.

For example, the SEC is examining conflicts of interest with regards to 12b-1 fees. Most recently, seventy-nine investment firms, including LPL Financial, Raymond James, Oppenheimer, and Wells Fargo have agreed to return more than $125 million to investors for failing to report conflicts of interest in their sale of mutual funds.

The settlement stems from the SEC’s Share Class Selection Disclosure Initiative (SCSD Initiative) announced in February of 2018. Under the SCSD Initiative, the SEC recommends standardized, favorable settlement terms to investment advisers who self-report violations of the federal securities laws relating to certain mutual fund share class selection issues.

Moreover, under the SCSD Initiative, eligible advisers that participate in the Initiative and report undisclosed securities violations, also will be required to disgorge all ill-gotten gains and reimburse the harmed clients. However, the SEC will not impose any additional civil monetary penalty on advisers.

Notably, the SEC also has warned advisers that stronger sanctions will be imposed should they not take advantage of the SCSD Initiative.

In this particular action, the investment firms failed to adequately disclose conflicts of interest related to the sale of higher-cost mutual fund share classes when lower-cost share classes were available.

In addition, FINRA is closely monitoring fees for conflicts of interest. FINRA’s examination overlaps with Congress passing the Tax Cut and Jobs Act of 2018, which opened up 529 education savings plans to allow distributions to be used for tuition from kindergarten through the 12th grade. FINRA’s examination coincides with its findings that some firms have failed to reasonably supervise brokers’ recommendations of multi-share class products such as 529 education savings plans. Moreover, as a result of those firms’ failure to supervise, there have been suitability violations related to brokers recommending 529 plan share classes that were inconsistent with their customers’ investment objectives.

The attorneys of Eccleston Law LLC represent investors and advisors nationwide in securities and employment matters. The securities lawyers at Eccleston Law also practice a variety of other areas of practice for financial investors and advisors including Securities FraudCompliance ProtectionBreach of Fiduciary DutyFINRA Matters, and much more. Our attorneys draw on a combined experience of nearly 65 years in delivering the highest quality legal services. If you are in need of legal services, contact us to schedule a one-on-one consultation today.

Related Attorneys: James J. Eccleston

Tags: james eccleston, eccleston law, eccleston law llc, eccleston, finra, sec, sales strategies, RIAs, scd initiative

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