On June 5, 2019, the SEC adopted a new rule under the Securities and Exchange Act of 1934, which requires broker-dealers and their representatives to act solely in the “best interest” of their retail clients when making investment recommendations. Among other things, “Regulation Best Interest”–or “Reg BI”–imposes new conflict-of-interest rules and requires broker-dealers to establish, maintain, and enforce policies reasonably designed to identify, and fully and fairly disclose, any such conflicts to investors. Firms and financial professionals must comply with the new rule by June 20, 2020. No extension given for the global pandemic.
Aside from the new “best interest” rules, there are many other mandates in the nearly 800-page rule, including specific new guidelines establishing what financial professionals may call themselves publicly. To the average investor, the terms financial advisor, financial consultant, or stockbroker may mean essentially the same thing. But, not to the SEC. Moving forward, financial professionals must disclose to their clients “all material facts relating to the scope and terms of the relationship,” including the capacity in which they are acting whether as a broker or an adviser. Investment “advisers” must pass the Series 65 exam and register with the SEC or state securities regulator before rendering investment advice. They traditionally have access to a wide variety of investment products and platforms, while “brokers” traditionally were limited to those investments offered by their firm.
Going forward, all financial professionals must be mindful of these and the other requirements of Regulation BI. FINRA has already signaled its willingness to pursue disciplinary actions against financial professionals who mis-classify themselves as “financial advisors” instead of brokers.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. Partner George C. Miller can be reached in the firm’s San Diego office at (619) 696-9500.
Although COVID-19 has upended many aspects of American life and our economy, the SEC advises that the novel coronavirus will not delay implementation of Reg BI.
On June 5, 2019, the SEC adopted a new rule under the Securities and Exchange Act of 1934, which requires that broker-dealers and their representatives act solely in the “best interest” of their retail clients when making investment recommendations. “Regulation Best Interest”–or “Reg BI”–imposes new conflict-of-interest rules and requires broker-dealers to establish, maintain, and enforce policies reasonably designed to identify and fully and fairly disclose any such conflicts to investors. The SEC intends that the new regulation will align the standard of conduct for financial professionals with the reasonable expectations of retail customers that that their financial representatives will, in fact, act in the customers’ best interest.
Reg BI became effective September 10, 2019, and it provides a compliance date of June 20, 2020. Given the unprecedented impact of the novel coronavirus on businesses and government entities, including investor-service operations, some speculated that the SEC would defer the compliance date.
In a statement issued April 2, 2020, Jay Clayton, Chairman of the SEC, announced that the June 30, 2020 compliance date will remain in place, stating that the June date for firms to be fully compliant with Reg BI “remains appropriate.”
Clayton acknowledged the challenges market participants face in light of COVID-19. He emphasized the importance of Reg BI, however–both in codifying the “fundamental principle” that “investment professionals should not put their interests ahead of the interests of their clients and customers,” and as a “key component” of a broader package of rules and interpretations that the SEC adopted contemporaneously “to enhance the quality and transparency of retail investors’ relationships with broker-dealers and investment advisers.”
Clayton further noted that in the ten months since Reg BI was adopted, the SEC and its staff have “engaged extensively” with market participants and regulatory partners to ensure effective implementation of the new rule. The Commission’s communications with impacted firms suggest to the SEC that most have made significant progress in adjusting practices, modifying policies and procedures, and otherwise aligning their operations to comply with Reg BI. Accordingly, Clayton believes that the majority of impacted entities are prepared to timely comply with Reg BI.
Clayton acknowledged, however, that some firms may not be prepared to meet the deadline–or meet other deadlines–and he encouraged firms to contact the Commission “[t] the extent that a firm is unable to make certain filings or meet other requirements because of disruptions caused by COVID-19, including as a result of efforts to comply with national, state or local health and safety directives and guidance.” Clayton anticipated that the SEC would “take the firm-specific effects of such unforeseen circumstances (and related operational constraints and resource needs) into account in our examination and enforcement efforts.”
Thus, although the SEC will not extend the June 30, 2020 deadline for all impacted firms, the Commission may consider an extension for Reg BI compliance by firms whose circumstances merit relief.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. Attorney Kara Siegel can be reached in the firm’s San Diego office at (619) 696-9500.
FINRA rule 2010 is a sweeping provision that mandates brokers and licensed persons subject to FINRA’s jurisdiction maintain “high standards of commercial honor”. One of the most common violations of that rule, which are aggressively pursued by both employing firms and FINRA, is the prohibition against modifying, completing or altering, in any way, a signed client account document or other form. A recent case illustrates the risk to licensed persons who modify, complete or alter those forms and documents- even if they do so at the client’s request or for the client’s benefit and particularly during the coronavirus pandemic.
Claire Cail was a 25-year veteran of the securities industry who spent the last 19 of those years at Morgan Stanley in Manchester, New Hampshire. She did something she thought was for the client’s benefit, but which resulted in her loss of her job at Morgan, suspension from the securities industry and a FINRA fine. She filled in missing information on a signed client form, including relatively innocuous information as filling in the client’s address and telephone number and checking a beneficiary box. She filled out new account and beneficiary forms for a Morgan Stanley prospective client the firm previously had rejected by combining the forms with prior signature pages and submitting them to the firm for processing.
As a result, the firm violated FINRA’s books-and-records rules by maintaining incorrect client data. In turn, Cail violated FINRA’s Rule 2010 by altering the documents. When Morgan discovered what she had done, they terminated her and reported her actions to FINRA. In turn, she was suspended from FINRA for three months and fined $5,000.00. FINRA’s letter assessing the suspension and fine states “Altering or completing signed customer documents violates FINRA Rule 2010 even when done to accommodate a customer”.
In other words, even if the client requests the changes or additions be made; or if the broker thinks he or she is helping and accommodating the customer, it is a black and white “no-no”. Do not, under any circumstances, modify, amend, complete or in any way alter a signed client document. Only the customer can make those changes, regardless of how difficult it may be for the customer.
We expect to see more of these cases coming down the pike during the coronavirus pandemic. Many clients cannot travel; get to the mail; may not know how to scan, print or email; and may ask, or expect, their broker to make the changes necessary to the account forms. It doesn’t matter, however, why the broker made changes or additions to the client documents and it is absolutely no defense to take the position the changes were made for the customer’s benefit. It is strictly prohibited by the rules of every member firm and by FINRA’s own rules, most notably 2010. What happened to Claire Cail is a lesson for every registered person. No good deed goes unpunished. Do not make any changes, of any kind, to signed client account forms and documents.
Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. For more information, contact Erwin J. Shustak, Managing Partner [email protected], or call 800.496.5900 ext. 109.
