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July 31, 2018 at 02:03 PM
The Securities and Exchange Commission’s proposed Regulation Best Interest, or Reg BI, for brokers differs from the best-interest standard for advisors in three “significant” ways, which could lead to investor confusion, says prominent ERISA attorney Fred Reish.
If the securities regulator’s proposed package of advice standards rules become final, “both broker-dealers and investment advisors will be able to say that they are subject to a best-interest standard of care and duty of loyalty,” explains Reish, partner in Drinker Biddle & Reath’s Los Angeles office, in a recent white paper he wrote for TD Ameritrade Institutional on the SEC’s three-pronged proposal.
(Related: SEC Nominee Roisman Would Keep ‘Open Mind’ on Best-Interest Rule)
“On the surface, those statements will be accurate, but will sound as if the standards are the same,” Reish states.
Here’s how Reish describes what he sees as “meaningful” differences:
1. Reg BI for broker-dealers applies only to recommendations of securities transactions or investment strategies involving securities transactions. For example, it does not apply to recommendations of account types, unless accompanied by a securities recommendation. However, all recommendations made by investment advisors are subject to the best-interest standard.
2. Reg BI for broker-dealers only applies to recommendations to “retail customers.” A retail customer is defined as a natural person, or the legal representative of a natural person (for example, a personal trust or an IRA), who uses the recommendation primarily for personal, family, or household purposes. That would exclude, for example, advice to charities, businesses and retirement plans. The RIA best-interest standard applies to all of the advisor’s clients.
3. Reg BI for broker-dealers would only apply at the time the recommendation is made. That means that there would not be a legal duty for broker-dealers to monitor the investment recommendations and accounts of their customers. Investment advisors have a duty of care to monitor their investment recommendations and accounts at appropriate intervals, unless they contract to limit that responsibility.
“The differences, and their consequences, only become clear when the scope of the duties is understood,” Reish states. “As a result, these rules have the potential to create confusion and misunderstanding in the marketplace.”
The saving grace to help remedy potential investor confusion, however, is the disclosure in the SEC’s proposed Form CRS Relationship summaries, Reish adds.
But as Reish points out, the SEC and other investor organizations are currently conducting testing to determine if investors understand the information in the CRS forms.
(Related: ‘Raise Your Voice’ Campaign Pushes for SEC Reg BI Changes)
The SEC’s proposed guidance on the Form CRS relationship summaries “is lengthy (over 150 pages of fine print), and the SEC asks for answers to over 200 questions.”
The investor testing results could mean the CRS forms “will be revised and reissued for comments,” Reish opines, and he encourages advisors to, “at the least, review the Form CRS proposed for RIAs, together with the instructions, and decide whether to comment on those.”
