David Wegner, Esq. of The Bowman Law Firm, LLC stated: “Reasonable regulation has its place in the alternative investment arena. At times, however, new regulations do have unintended consequences. Regulation BI was designed to enhance clarity and disclosures to investors in the financial services space, though its implementation has required significant expenditure of time and effort. However, if a broker-dealer or investment advisor was not already taking steps to establish the best interests of their clients – being clear on relationships and fees; disclosing their potential and actual conflicts of interest; and living by a steadfast standard of conduct – a form alone may not change that.”
As an advocate of the alternative investment industry, no one, including Bowman Law, wants to see the space suffer nor contract due to the unintended consequences of any regulation. Planning and strategic partnerships in the industry will be key in easing the burden anticipated under Reg BI.
Do Alternative Investment Product Providers Have To Do More To Support RIAs Or Risk Losing Some Of Their Selling Group?
Aside from affecting BDs and investment advisors, Reg BI could have a profound impact on alternative investment product providers. If Reg BI pushes advisors away from more complex product offerings, it may encourage more advisors to continue toward plain vanilla investment strategies, in which product providers in the alternative investment space will truly feel the effects. With that said, product providers may have to find ways to support RIAs and BDs by handling their Reg BI burdens in hopes that it allows them better access to, and opportunity for alternative investment offerings. Alternative investment product providers should ask themselves two questions:
· Are we prepared?
· How can we better support RIAs and BDs?
This may prove difficult for boutique alternative investment providers who are limited by having few team members. However, larger firms may consider developing small teams to help solve this potential problem stemming from Reg BI.
Educational Requirements Of Reg BI
Some training providers are trying to stay ahead of this curve in providing educational support around some of the more complex product verticals. This ranges from a refresher course in certain types of investment, to a holistic market view around that product, incorporating some provider structure and fee comparisons. It is yet to be seen whether the regulators give due credit for advisors who sharpen the axe, but there is never any harm in improving our knowledge or hearing other viewpoints on the marketplace.
Hillson Consulting is working diligently on three fronts to provide support:
1) An independent party to help product providers provide the necessary support to RIAs.
2) Support to RIAs doing their due diligence on the market and comparing products and fee structure.
3) Working with an educational partner, so that advisors can get a third-party certificate of completion for further study in that product vertical.
Although Regulation Best Interest is in its early days, the consensus of interpretation suggests that this will be more cumbersome for BDs, but still a burden for RIAs. Arthur Loyd, Esq. from The Bowman Law Firm, LLC agrees: “It is particularly onerous to the BDs as they have historically been held to the suitability standard while RIAs have a fiduciary duty, arguably a higher threshold than the “best interest” requirement. Implementation of processes and procedures for compliance with the Regulation will be felt by all parties on the front end. Appropriate disclosures by, and due diligence and analysis of, product sponsors and issuers will help ease that burden for BDs and RIAs.”
Understandably, there have been numerous conversations about how the SEC will be monitoring this new mandate. We may need to wait for the ensuing “case law” to see just how the regulators interpret this in practice and enforce. Furthermore, under President-elect Joe Biden, we may see a more aggressive interpretation of Reg BI as well as stricter enforcement. In fact, SEC Chairman Jay Clayton noted that they are hiring additional examiners to increase their focus and efforts with regard to Reg BI compliance, according to an article by Melanie Waddell, Washington Bureau Chief, Investment Advisory Group.
However this unfolds, it is never contrary to client interests for product providers to educate client facing fiduciaries, nor for advisors to gain a better understanding of the marketplace and what is available. Even more importantly, anything that encourages advisors to gain more clarity and understanding surrounding product offerings, especially in the alternative investment space, is a step in the right direction.
Anthony Potenza is a junior associate at Hillson Consulting.