Does Reg BI Mean the Death of Broker-Dealers?

What You Need to Know

Opponents of Reg BI feared that new regulations would be the death knell of broker-dealers.
Most broker-dealers are careful in the products they offer to their clients.
If you do the right thing, you won’t have to worry about enforcement.

One thing has become clear as we look back on the implementation and enforcement of Regulation Best Interest: It has not only caused a rethinking of what types of products and services advisors want to offer their clients, but also a rethinking of how advisors want to operate.

The Securities and Exchange Commission’s Regulation Best Interest, better known as Reg BI, replaced the broker-dealer suitability standard with an RIA-like fiduciary standard to require that broker-dealers recommend only products that are in their clients’ best interests.

It also requires registered reps to clearly identify any potential conflicts of interest and financial incentives the broker-dealer may have for the sale of those products.

The obligations under Reg BI are fourfold:

Disclosure Obligation. Registered reps must provide certain required disclosures before or at the time of the recommendation.
Care Obligation. Registered reps must exercise “reasonable diligence, care and skill in making the recommendation.”
Conflict of Interest Obligation. Requires broker-dealer firms to “establish, maintain and enforce written policies and procedures reasonably designed to address conflicts of interest.”
Compliance Obligation. Requires broker-dealer firms to establish, maintain and enforce “written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest.”

What’s Happened So Far

First, it’s important to note that the expected turmoil around the implementation of the rules has not occurred. Opponents of Reg BI feared that there would be a chilling effect across the industry, particularly as enforcement picked up.

I never bought that argument, since most registered reps have operated with the best interests of their clients. Tightening standards is fine for advisors who make the right decisions in their daily work.

Indeed, last year saw the first Reg BI-related enforcement actions by both FINRA and by the SEC. It wasn’t hard to see why the regulators took action.

Both agencies have said more enforcement actions are coming, so it bears watching. But certainly the regulatory sky is not falling. That’s a credit to the industry.

Going Forward

It’s clear, however, that the rule will have a profound effect on advisors in other ways.

When we started Aurora Private Wealth, we also created APW Capital, a full-service broker dealer. We recognized that even though our advisors were committed to giving conflict-free advice we knew that for some clients, transaction-related business was important in products like variable annuities.

Practitioners know that having the widest range of tools at their disposal, whether fee-based or transaction-based, allows them to best fulfill their fiduciary duty to clients.

The issue going forward will be whether advisors eschew transaction-based products in favor of keeping strictly to a fee-based approach.

That would be troublesome, because some products are proper and best for client portfolios, even if the compensation structure for the advisor strays from the standard fee model.