On Aug. 3, SEC guidance on Reg BI, IA fiduciary conflicts of interest.
SEC published Staff bulletin of questions/answers reiterating standards of conduct for broker-dealers and investment advisers in identifying, addressing conflicts of interest.
Follows SEC chair May 2022, remarks on digital advice client protection, see #138188.
Reg BI and Fiduciary Standard
Regulation Best Interest (Reg BI) for broker-dealers and the fiduciary standard for investment advisers (IA fiduciary standard), are drawn from key fiduciary principles.
Obligation act in investor's best interest, not own interests ahead of investor interest.
Under Reg BI and IA fiduciary standard, conflict of interest is interest that may incline the B/D or IA, to make recommendation or render advice that is not disinterested.
Identifying and addressing conflicts should not be merely a check-the-box exercise, but should be conducted as a robust, ongoing process that is tailored to each conflict.
Therefore, important that firms and their financial professionals review their business model and relationships with investors to address conflicts of interest specific to them.
Conflicts of Interest Standards
All broker-dealers, investment advisers, and financial professionals have at least some conflicts of interest with their retail investors
Have economic incentive to recommend products, services, account types that provide more revenue or other benefits for firm, even if not in best interest of retail investor.
Examples of common sources of conflicts of interest can include, but are not limited to, compensation, revenue or other benefits (financial or otherwise) to firm or affiliates.
Firm expected to identify conflicts of interest; under Reg BI, broker-dealers must establish, maintain and enforce written policies and procedures reasonably designed to identify all conflicts of interest associated with recommendations to retail customers.
Appropriate steps depend on firm’s specific business model; provided certain non-exhaustive steps to identify conflicts, consider including in policies and procedures.
Once identified all conflicts of interest, disclosure of conflicts alone will not satisfy the obligation to act in retail investor best interest; some conflicts address by mitigation.
Circumstances when particular conflict be eliminated; Reg BI explicitly requires policies to identify, eliminate any sales contests, sales quotas, bonuses, and non-cash compensation based on sales of specific securities/types within limited period of time.
