Could the Securities and Exchange Commission use its new conduct rules—Regulation Best Interest-- to apply a fiduciary duty to registered investment advisor outside businesses, like their CPA or tax preparation companies? A mortgage brokerage subsidiary? Or any other type of service or business the RIA or its partners own?

That’s the potential hellscape securities attorney Stephen Galletto, a partner with Stark & Stark’s Investment Management Practice Group in Lawrenceville, NJ, is working to help his RIA clients guard against.

Galletto says the securities practice in his firm, which works with RIAs of various sizes across the country, is actively debating how to ensure that RIAs' outside businesses don’t get caught up in the new Reg BI regulations and interpretation when they go into effect June 30, 2020.

“I think we’re in an environment where the SEC could come into a firm where much of the time it is a CPA firm and apply Reg BI. Will they subject CPA services to a fiduciary duty as well?” Galletto asked.

“What we want to create for clients is a better separation between business interests and advisory services so they do not fall into a category where everything they are doing is viewed as subject to the fiduciary standard,” he said.

The SEC said that it’s latest interpretation affirmed: “The investment advisor’s fiduciary duty is broad and applies to the entire advisor-client relationship.
“The Commission has previously recognized the broad-scope investment advisory relationship ...does not permit an advisor to exploit that fiduciary relationship by defrauding his client in any investment and does not require that the activity be ‘in the offer or sale of any’ security or ‘in connection with the purchase or sale of any security.’”

Galletto said he and his partners are working to anticipate where the SEC may go in terms of the application of the new standards. “We are debating how specific we want to get in terms of describing the depth and breadth and fees of services that are fiduciary services for contract purposes and those that are excluded. We are just trying to get ahead of where the SEC may go in terms of ancillary services that might be held to a fiduciary standard.

“A well-protected firm clearly states the scope of an engagement, services being rendered and the fees negotiated by the advisor and client,” Galletto said.

The “squishy” contracts he often sees could make RIAs vulnerable if the SEC begins to apply Reg BI vigorously, said the attorney who works mainly with advisor firms (as opposed to broker-dealers or dually-registered firms that are offer both brokerage and RIA services), said firms’ contracts he reviews are often “squishy,” which could make RIAs vulnerable if the SEC begins to apply Reg BI vigorously.

“Written agreements come in all sorts of shapes and sizes, but I see quite a few contracts where the terms are just not so clear,” Galletto said.

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