Retail Brokerage

Retail Brokerage

In these uncertain times, the value of objective financial guidance cannot be overestimated, and the importance of the financial profession has never been more apparent.

 June 30, 2020 marked the implementation of regulations passed by the Securities and Exchange Commission (SEC) called "Regulation Best Interest" or "Reg BI".  The rules include a new standard of care for broker-dealers, as well as new disclosure and compliance obligations.  You will see some of the changes manifested in a new standard communication — a customer relationship summary called Form CRS, required under a separate regulation issued by the SEC — that your broker-dealer and/or investment adviser will provide.

 There is a lot to Reg BI and Form CRS, but it really boils down to one thing - transparency.  Here is what you need to know about how the new rules affect you as an investor.

 When you work with a financial professional, what duty of care applies?

 Historically, financial professionals associated with broker-dealers were held to a "suitability" standard, essentially requiring a reasonable basis to believe a recommended transaction or strategy be suitable for their client.  The factors to be considered were the investment portfolio, age, experience, risk tolerance, liquidity needs, objectives, and time frames.  The new rules, as the name Regulation Best Interest implies, now impose a requirement that a broker-dealer must believe that a recommendation is in your best interest, considering the above factors.

 If you worked with a broker-dealer while the suitability standard was still in place, does this mean that any advice or recommendations you received weren't in your best interests?  Not at all.  It just means the standard applied in reviewing those recommendations was different.  The new standard makes clear that broker-dealers cannot place their interests before yours.

 How might that happen?  One example may be the temptation to recommend a product with a higher commission over one that pays a lower commission.  The new rules make it clear that any recommendation or advice you receive from a financial professional comes with the understanding that your needs and interests come first. 

Disclosing conflicts of interest

 Reg BI requires broker-dealers to establish, maintain, and enforce written policies and procedures that are reasonably designed to address conflicts of interest associated with recommendations to retail customers.  This means:

 ·         Identifying and disclosing all conflicts of interest associated with recommendations if those conflicts of interest cannot be eliminated. This includes anything that could create an incentive for a financial professional to recommend something that might not put your interests first

·         Disclosing when recommendations are based on a limited product menu or restricted to proprietary product offerings

·         Eliminating sales contests, quotas, bonuses, and other policies that could potentially influence the recommendations made

 RIAs, as part of their fiduciary duty, already have a similar obligation to disclose any conflicts of interest that could potentially impact the advice or recommendations they provide to clients.