But I Only Have Institutional Investors: See How Reg BI impacts your business

On June 5, 2019, the SEC on a 3 to 1 vote approved Regulation Best Interest. This regulation is the SEC’s attempt to align broker-dealers with the fiduciary rule that governs investment advisers.

It has been a long-held belief that broker-dealers have internal conflicts because they sell products that are packaged by affiliates and sell securities that their trading desks own. However,  broker-dealers had to make recommendations based upon what is suitable for the client.

Investment advisers based upon case law, (see, SEC v. Capital Gains Research Bureau et. al. 375 U.S. 180 (1963)) were held to a fiduciary standard which centered around disclosing potential conflicts and a few prohibitions on conducting transactions with affiliated broker-dealers unless given permission by the client.

I have always felt that the suitability rule made more sense than the fiduciary rule. A registered representative had to look at the full financial picture of the client, sophistication and risk level and make a determination of what type of investments made sense. The client could participate and override the assessment. Under the fiduciary rule, advisors normally take discretion and rather than making recommendations determine allocations and investments and execute on a plan.

The new Reg BI tries to move the broker-dealer suitability standard closer to the fiduciary rule. I have not been focused on this new regulation during the approval process because most of my clients deal with institutional investors (FINRA Rule 4512 ) or qualified purchasers and qualified institutional buyers.

But beware. The SEC did not relied upon FINRA Rule  4512  in determining who is owed reliance under this new regulation. Any natural person is covered, regardless of financial assets. Natural persons regardless of assets are covered by the regulation.

Every firm should undertake an analysis of its client base. If you have natural person, clients who are considered institutional investors under the FINRA rule you need to review your written supervisory procedures and update them within the next year.


(C) Sharon M. Davison 2019


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