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SEC Warns Broker-Dealers and Advisers About Disclosing Conflicts of Interest

By George C. Miller, Partner of Shustak Reynolds & Partners, P.C. posted on Thursday, August 4, 2022.

George C. Miller

George C. Miller


Location: San Diego, California
Phone: (619) 696-9500 (Ext. 105)
Direct: (619) 501-8270
Email[email protected]

Under both Regulation Best Interest (“Reg BI”) and the Investment Adviser fiduciary standard, firms and financial professionals should provide recommendations only when they have a “reasonable basis to believe that the recommendation or advice is in the retail investor’s best interest.” According to a recent SEC staff bulletin, complying with Reg BI and the fiduciary standard requires broker-dealers and investment advisers to identify and disclose conflicts of interest—particularly those tied to adviser compensation. The common practice of “checking a box” on forms, which generically disclose conflicts to clients, is not enough.

According to the SEC, most registered representatives and investment advisers are faced with conflicts of interest on a daily basis. And there is an inherent conflict when an adviser or representative is financially incentivized—consciously or unconsciously—to recommend one investment product over another. The SEC staff believes advisers and registered representatives must engage in a “robust, ongoing process that is tailored to each conflict…” and that firms and professionals must “review their business models and relationships with investors to address conflicts of interest specific to them.” A one-size-fits-all approach to conflicts will not satisfy Reg BI or the fiduciary standard.

Moreover, simply identifying and disclosing to investors potential conflicts of interest, without more, is not enough. Firms and financial professionals must provide enough detail about conflicts so investors can give their informed consent if they decide to proceed. And some conflicts cannot be waived. When, for example, a firm adopts a policy providing for substantial compensation or incentives based on benchmarks, sales quotas, or other performance metrics, it may be impossible for a recommendation under the policy to comply with Reg BI or the fiduciary standard. In the SEC’s view, the greater the potential reward (or penalty) to the adviser, the higher the likelihood a recommendation under the policy may violate Reg BI.

While the SEC stopped short of concluding performance-based compensation violates Reg BI, it explained “[i]n cases where the firm finds that a particular incentive practice is causing its financial professionals to place the firm’s or the financial professional’s interest ahead of the retail investor’s interest, the firm may need to revise its incentive program to reduce or eliminate the conflict.” 


Shustak Reynolds & Partners, P.C.’s securities lawyers in San Diego, Irvine, San Francisco, and New York are highly experienced in handling a wide variety of securities litigation, business disputes, investment disputes, employment and trade secret disputes, breach of contract claims, and other matters.  We represent public and closely held companies, brokerage firms, investment advisors, registered representatives, and individuals in California, New York and elsewhere across the country.


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