38 INVESTMENT ADVISOR NOVEMBER 2020 | ThinkAdvisor.com
going to be able to say: ‘We act in your
best interest.’ But you really can’t do
both: you can’t represent the buyer and
Is Reg BI going to improve the stan-
dard of conduct for brokers?
“Yes,” according to Rhoades, “but itremains to be seen how much of animprovement. It certainly won’t eliminate conflicts of interest. It will certainlyminimize a few,” such as sales contests.
“And hopefully it will lead to structuresof broker-dealer firms that callfor level compensation. We’vealready seen some indicationof some firms that it mightactually lead to lower levels ofcommissions.”
David Ackerman, an attorneywith NICE Actimize, a provider of financial crime, riskand compliance solutions,agreed with Rhoades that brokers, like fiduciary advisors,will have to prove that they’reacting in clients’ best interest.
Where “a lot of firms arestruggling” is showing thatthey’re “making a good-faith effort” toact in the best interest of the client.
“What is the best way to illustrate that?How do I prove something that is sosubjective?” Ackerman said.
“It’s the same challenge for the fidu-
ciary advisors as well. They have a dif-
ferent legal standard but ultimately it’s
up to them to prove or disprove that they
held themselves to that level. Broker-
dealers are going to be the same.”
Having said that, Ackerman believes
the SEC has “made an honest effort” to
get as much information out as possible
since Reg BI was adopted in 2019.
Clayton “is not in the surprise busi-
ness,” Ackerman said. “He has stated
this is going to be one of the largest
changes and increases in retail investor
protection in the last 10 years, so you
can’t have business as usual and then
still maintain that this is an increase to
Fred Reish, a partner with Faegre
Drinker in Los Angeles, states in a recent
blog post the difference between best inter-
est and suitability “is not easily defined.”
Reish’s examples focus on the Reg BI
requirement that broker-dealers (and
their registered reps) consider costs in
the development of recommendations.
While costs are not the only factor to be considered, the SEC saysthat “best interest” makes cost a moreimportant factor than it was under thesuitability standard.
The Reg BI Obligations for Care andConflicts of Interest “are connected atthe hip because the conflict of interest(‘compensation’) is often embedded inthe cost of the recommendation andcost must be considered under the CareObligation,” Reish explains.
“A financial professional must con-
sider cost to the investor in making
a recommendation, which could mean
that the recommendation of a higher-
cost investment would violate the Care
Obligation (which is placed on both the
broker-dealer and the financial profes-
sional) and the Conflict of Obligation
to mitigate the compensation incentive
of the financial professional (which is
imposed on the broker-dealer).”
Recommending certain products,Reish explains, “invokes the heightenedconsideration of costs under” Reg BI.For instance, a higher compensatingshare class of a mutual fund or an annuity with a higher commission.
FORM CRS COMPLIANCE
As to Form CRS, the SEC hasbeen focusing on the formduring exams. AdvancedRegulatory Compliance notesin a recent alert that the securities regulator is looking at policies and procedures in placefor filing Form CRS, updatingit as required, posting it to firmwebsites, and delivering it toclients (Rule 206( 4)- 7).
The SEC, the compliance
group says, wants to see the
of Form CRS being delivered
to new and existing clients by close of
business as of X date.
• If the Form CRS was delivered electronically, was it presented prominentlyin the electronic medium? Was it easilyaccessible for retail investors (example:a direct link or provide the Form CRS inthe body of an email or message? Pleaseprovide a sample).
• A record of the dates Form CRS wasgiven to clients, including amendmentsto it, including prospective clients thatbecame clients.
• In cases where a registrant’s website is currently under construction:Does the firm plan to include a link tothe Form CRS on the website when thefinal updates are completed?
Washington Bureau Chief Melanie Waddell canbe reached at email@example.com.
“And hopefully [Reg BI] will
lead to structures of broker-
dealer firms that call for level
compensation. We’ve already
seen some indication … that
it might actually lead to
lower levels of commissions.”
—Ron Rhoades, Western