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Industry Spotlight > Broker Dealers

BDs Should Stop Using the A-Word in Light of Reg BI: Attorneys

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As examination of the Securities and Exchange Commission’s Regulation Best Interest continues, industry attorneys are directing broker-dealers and dually registered advisors on how to proceed when it comes to using the terms “adviser” and “advisor.”

Eversheds Sutherland attorneys write in a recent alert that Reg BI effectively prohibits a broker-dealer and its associated persons from using the term “adviser” or “advisor” if the broker-dealer is not a registered investment advisor or the associated person is not a supervised person of an RIA.

In light of this restriction, the attorneys state that dual registrants or standalone broker-dealers who currently permit their associated persons to use the term adviser or advisor in their designation “will likely have to revisit this practice if their associated persons are not also registered as an, or supervised by a registered, investment adviser.”

Moreover, the attorneys say, “a standalone broker-dealer whose business name includes the term adviser or advisor will likely have to consider a change in its name.”

BD firms “might also want to consider designations for their associated persons that appear in marketing collateral, such as websites, account agreements, marketing materials and associated-person stationery,” the attorneys advise.

Gail Bernstein, general counsel for the Investment Adviser Association, told ThinkAdvisor on Tuesday that the SEC states in Reg BI that it’s also “going to watch the marketing tactics of broker-dealers so that they don’t mislead.”

IAA is concerned, however, that “when you read with the solely incidental interpretation, which is more a little more expansive than we would have hoped, it would allow brokers to do some ongoing monitoring without having to register as advisors,” she said.

Bernstein added: “Potentially, if the solely incidental interpretation is construed broadly to allow brokers to do ongoing monitoring, that may undermine the efforts in Reg BI to limit their activities and limit their marketing.”

How Many BD Reps Are Affected?

Micah Hauptman, financial services counsel with the Consumer Federation of America, notes that Reg BI states that approximately 100 broker-dealers with retail customers that are not also investment advisors use the terms “adviser” or “advisor” in their names, and approximately 16% of all registered reps that are not dually registered use these titles.

Footnote 685 in the Form CRS proposing release states that approximately 226,132 registered reps of broker-dealers are not also registered as investment advisory reps, Hauptman says.

Among these registered reps, approximately 119,729 are employed by dually registered firms, which means 106,403 are employed by standalone broker-dealers.

Further, if only 31% of broker-dealer registered reps that are not dual-hatted use titles containing the terms “adviser” or “advisor,” the SEC estimates that the total number of non-dual hatted registered reps that would be potentially subject to this proposed prohibition would be 70,101, which is approximately 15.5% of all registered reps.

Of these reps, 32,985 are employed by standalone broker-dealers and approximately 37,116 are employed by dual registrants.

“The number of non-dual hatted registered representatives at dual registrants that would be potentially affected by the rule is likely lower than the estimated 37,166 because some of these representatives may be supervised persons providing advisory service without being dual-hatted,” Hauptman states.

The SEC also states that it’s unable to estimate how large the fraction of such registered reps would be. On the other hand, the agency said, it does not “have information about how many dual-hatted registered representatives among dual registrants that they are not supervised persons providing advisory services despite being dual-hatted, and therefore would also be subject to the proposed restriction on the use of certain titles.”

— Check out How (Not) to Name Your Advisory Firm on ThinkAdvisor.


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