Top RIA Compliance News Articles for the Week of June 22, 2018

1. SEC Will Make RIAs, Brokers Look Like ‘Identical Twins,’ Groups Say (Author- Tracey Longo, Financial Advisor Magazine)

As reported by Tracey Longo, “Six investment advisor groups launched a campaign asking advisors to tell the SEC its proposed customer relationship summaries will confuse investors rather than illuminating critical legal and regulatory differences between advisors and brokers.” The campaign titled “Raise Your Voice” is asking advisors to respond the the August 7th deadline “by outlining their fiduciary practices and principles.” According to Knut Rostad, president of the Institute for the Fiduciary Standard and spearhead of the campaign, “the proposed rules depict broker and advisers as essentially the same, like identical twins, but without investor protections.” While the SEC summaries are supposed to outline for investors the difference between, advisors, broker-dealers and dually-registered brokers, some believe the descriptions fall short. “Critics of the proposal say calling the proposal a ‘best interest’ regulation, which the SEC fails to define in the proposal, will sound more attractive to customers without requiring brokers to put investors’ best interest first at all times.”

2. SEC Advice Proposals Take Center Stage (Author-Melanie Waddell, ThinkAdvisor)

The SEC proposed advice rule is continuing to move forward. Earlier this month, the Commission held its first town hall in Atlanta. Regarding the agencies comment period for the three part rule, SEC Chairman, Jay Clayton, stated to Senate lawmakers it’s going “to take at least 90 days.” He also said he’s “not going to take forever.” Many consumer groups are pushing Clayton to extend the comment deadline. During the Commissions first town hall, “Clayton laid out for attendees how he sees brokers’ behavior changing under Reg BI.” Under the new Reg BI standard, brokers must put the clients’ interest ahead of their own. In addition to the discussed potential change in broker behavior, there continues ongoing debate around creating a “uniform fiduciary standard”. 

3. Interesting Angles on the DOL’s Fiduciary Rule #96 (Author- Fred Reish, FredReish.com)

Reish’s 96th article picks up where his 95th article left off. His second installment of a three part series focuses on “the advice recipients, that is, which investors will be protected by the best interest standard of care if the advice is given by a broker-dealer or, alternatively, if the advice is given by an RIA.” According to Reish, “Reg BI’s standard of care would only protect ‘retail customers.’ ” “Reg BI defines ‘retail customer’ as: ‘A person or the legal representative of such person, who . . .`u`ses the recommendation primarily for personal, family, or household purposes.’ ” Reish continues to say, “Based on my reading of the SEC proposal, and on my conversations with securities lawyers, a ‘retail customer’ includes individual investors, family and personal trusts, IRA owners, and plan participants. However, it does not include businesses, retirement plans, and tax-exempt organizations.” On the flip-side, in the interpretation of the RIA model, the SEC states, “An investment adviser has a fiduciary duty to all of its clients, whether or not the client is a retail investor,” and “This obligation to provide advice that is suitable and in the best interest applies not just to potential investments, but to all the investment advice provides to clients . . . .” In short, the best interest duties of an investment adviser are much broader than what is proposed for broker-dealers.

4. 3 questions advisors should ask about best execution in bond transactions (Author- David Hsu, FinancialPlanning.com)

According to David Hsu, “Prior to the advent of FINRA’s Trade Reporting and Compliance Engine and the MSRB’s Electronic Municipal Market Access systems for transaction reporting, the concept of best execution in the fixed-income markets was somewhat vague.” In his article, Hsu notes, “The SEC said in 1986 that, in seeking best execution, an asset manager must ‘execute securities transactions for clients in such a manner that the client’s total cost or proceeds in each transaction is the most favorable under the circumstances.’ The SEC has declared that, in seeking this standard, a manager “should consider the full range and quality of a broker’s services in placing brokerage including, among other things, the value of research provided as well as execution capability, commission rate, financial responsibility, and responsiveness to the … manager.’ With that in mind, Hsu encourages all advisors to think about the following questions with regards to best execution in the fixed-income market: 1)What is new? 2) If I am not regulated by FINRA, do those rules apply to me? 3) What should I look for in a trading partner? To get a more in depth view of the three questions, view Hsu’s article in it’s entirety. 

5. Supreme Court Ruling on SEC judges unlikely to upend advice industry (Author – Greg Iacurci, InvestmentNews)

In a Supreme Court ruling on last Thursday, the court sided with a former investment adviser who stated “the SEC’s appointment process for its in-house judges, called administrative law judges, was unconstitutional.” According to Iacurci, “Legal experts don’t believe the Supreme Court’s ruling will have a broad effect on the use of administrative law judges — the ruling didn’t challenge the judges’ overall constitutionality, just the constitutionality of the process by which the judges are appointed.”

Don’t forget to check out last week’s top RIA compliance news articles on the DOL fiduciary rule, the SEC’s proposed advice plan, and FINRA’s potential overhaul to its registration and disclosure program. Be sure to check back next Friday for next week’s top articles!