“If you are a dually licensed financial professional, you need to make a best interest evaluation taking into consideration the spectrum of accounts you offer (i.e., both brokerage and advisory accounts, subject to any eligibility requirements such as account minimums),” the SEC wrote in a staff bulletin designed to provide clarity on the issue. “Firms should provide clear guidance, through policies and procedures and other instructions to their financial professionals.”
This month, the SEC started charging firms and registered reps under Reg BI for violations for unsuitable investment choices, and more charges are expected as dually registered firms try to navigate the new terrain without losing the very profitable aspects of their business.
A North American Securities Administrators Association report late last year found that broker-dealers have been slow to make big changes in the way they do business, especially when it comes to reconciling fee structures. “NASAA’s member states did not see the tide-turning reforms they had expected to see in the broker-dealer industry after Regulation Best Interest took effect,” wrote Melanie Senter Lubin, NASAA President and Maryland Securities Commissioner. “This examination reveals that while there were some improvements, most firms are operating in the same manner as they were under the suitability rule, especially when it comes to harmful compensation conflicts.”
How dually registered broker-dealers handle Reg BI in practice remains to be seen. After decades of consolidation, the idea of divesting brokerages from advisory services would be an anathema, sources agreed. And raising the fees on the advisory side to match the brokerage side would put an end to the business, as clients could make the same investments and pay substantially less at registered investment advisors who don’t have the same conflict.
Several private equity executives said these decisions on how fees were charged are determined by the wirehouses. Regarding the RIA world, they said fees were substantially less even though it wasn't completely clear whether fees were determined by the advisor or custodian.
Besides Duggins and Caravello, Stein submitted his documentation to Michael Rufino, formerly with Finra and now with the SEC; Joseph Borg, former president of NASAA and director of the Alabama Securities Commission; Ricky Locklar, senior special agent at the Alabama Securities Commission; Lev Bagramian, former senior professional staff member of the U.S. House of Representatives and now director of the House Financial Services Committee Investor Protection, Texas.
Kurt Stein's document to the SEC.