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What You DIDN’T Know About Making Recommendations

What You Didn’t Know About Making Recommendations | Atlanta, GA 30339

Did you know that as of July 2019, the SEC has adopted Regulation Best Interest (Reg BI)? This new standard of conduct requires you to act in the best interest of the retail customer at the time the recommendation is made, without placing your financial or other interest ahead of the retail customer’s interests.

So, how does this affect the RIA?

For RIAs, the new rules have little impact. Reg BI does complicate the differences between fiduciary RIAs and brokers and makes it harder for consumers to determine who is a fiduciary and who is not. This is requiring a broker to act in a best interest capacity without holding them to a full fiduciary obligation like that of the RIA. RIAs, like brokers, will be required to file a Form CRS (Customer Relationship Summary) but they remain regulated as fiduciaries under the 1940 Investment Advisors Act. The CRS form lays out the services that brokers and advisors will provide to clients, the fees and costs of those services, the conflicts of interest they may have, the standard of conduct by which they are regulated and whether the firm or advisor has a legal or disciplinary history.

This rule does however change the level of customer care required by that of the broker as previously they were only required to recommend investments that were suitable to their clients
(which is a broad concept). Reg BI now requires brokers to act in the best interest of the retail customer as stated above.

Reg BI breaks this down into four obligations for a broker:
1. Disclosure of the terms of the relationship (Form CRS)
2. Assessment of risks, rewards and costs associated with recommendations
3. Disclosure and mitigation of conflicts of interest such as compensation from proprietary products and payments from third parties such as mutual fund managers and annuity providers
4. Development and maintenance of procedures to comply with Reg BI

This raises the bar for brokers by holding them to a higher standard of care.

Like the Department of Labor’s Fiduciary Rule, Reg BI has found itself the subject of multiple lawsuits.  Most notably, Messrs. Dodd and Frank themselves believe that Reg BI should be struck down as it does not subject to brokers and financial advisers to the same fiduciary duty.  Stay tuned as the Reg BI drama continues.

Want to get a head start?  Download our Form CRS Template.

Need more help?  Schedule your consultation today.

Author Bio

Leila Shaver is the Founder of My RIA Lawyer, a law firm that provides compliance and legal consulting for financial institutions. With extensive experience as a securities attorney and compliance expert, she has served as Chief Compliance Officer and General Counsel to RIAs, BDs, and TAMPs with billions in assets under management.

Leila understands the challenges RIAs face and is committed to helping RIAs streamline their processes, mitigate risks, and ensure compliance with regulatory requirements. She received her Juris Doctor from Atlanta’s John Marshall Law School and is a West Georgia Young Lawyers’ Association member. Leila has received numerous accolades for her work, including the Carroll County Bar Association’s Outstanding Young Lawyer Award in 2017.

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