Publications

- September 1, 2020: Vol. 7, Number 8

Roundtable: What does the SEC’s Regulation Best Interest (Reg BI) mean — for better or worse — to the private wealth industry?

by contributing executives

Doc Kennedy, founder and president, AdvisorLaw

As a shock to precisely nobody, Reg BI has a lot to do with disclosure. Throughout the 175-page SEC release adopting Reg BI, there are 1,571 instances of the word “disclosure.” Reg BI requires full and precise disclosure of how wealth managers are paid; as well as requiring potential conflicts of interest be communicated to the clients. For those incorporating any products/investments that result in commission-based compensation, it is unclear if any explanation or defense will be accepted by regulators, as they are already making it clear that those receiving compensation of both fees and commissions will be heavily scrutinized.

 

Ned Montenecourt, SVP and chief compliance officer, Phoenix American Financial Services

Regulation BI, requiring broker/dealers and registered investment advisers to act in the best interest of their clients, aligns investor suitability compliance and best interest contract standards for two communities with radically different business models. This will be hard work requiring the wholesale reinvention of existing compliance infrastructure. The “reasonable basis analysis” for reaching an “informed decision” for each investment will mean new software systems, new procedures and years of adjustments, regulatory exams and feedback loops to develop a compliant framework. But, if broker/dealers and RIAs find their way to an infrastructure that reduces confusion, increases transparency and preserves choice, the upside will be higher levels of investment across all product classes.

 

Lori Kamen, chief compliance officer, Concorde Investment Services

The regulation was designed to enhance the quality and transparency of retail investors’ relationships with investment advisers and broker/dealers, bringing the legal requirements and mandated disclosures in line with reasonable investor expectations, while preserving access (in terms of choice and cost) to a variety of investment services and products. This helps to level the playing field within the financial industry. Largely, those objectives have been achieved by the new regulation. Challenges remain, such as the significant technology enhancements for broker/dealers. Finally, this consistent standard applies to all federally registered advisers, but not state-registered advisers, which may result in future state regulations.

 

Bart Malcom, partner, due diligence, MBD Solutions

Fortunately, Reg BI raises the standard for investor protection while providing investors a choice in financial services. Investors continue to have a choice between commission-based services or fee-based services. However, with Reg BI, private wealth organizations have a new opportunity to emphasize their value-add propositions to clients with products and services best suited for the individual or a family’s specific financial needs. As a result, Reg BI allows private wealth organizations to accentuate the fact that the firm and its clients are genuinely pulling in the same direction.

 

 

Mike Bendix, CEO, DFPG Investments

Now that it is implemented, I don’t expect Reg BI to have a negative effect on our advisers’ ability to serve their clients whatsoever. Beginning with the proposed DOL fiduciary rule several years ago, we implemented a number of protocols to ensure potential conflicts are removed or adequately addressed. These procedures take place at all levels of our workflow — due diligence, compliance and operations. The net result is a suite of products that offers transparency for our reps and their clients alike without being overly burdensome.

 

Brad Updike, director, Mick Law P.C.

It’s a great development for our industry, as broker/dealers will now unquestionably need to consider what products work best for their clients in terms of fees, structure, information transparency, asset quality and economic viability. Hopefully, this will lead to fundraising success by better structured alternative products, which in turn will improve the client’s investment results, which in turn will also enhance the credibility of the broker/dealer community. In the end, investors will also finally realize the benefits of alternatives as “best in class” products, and alts will finally get the recognition they deserve over the tier 2 and tier 3 structured products that are heavily promoted with clever marketing gimmicks.

 

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