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Let’s take a closer look at these rules and how they affect broker-dealers and advisors.
Don’t forget to check the Practice Management section to learn about better ways of growing your practice and becoming more efficient.
In addition to the new regulations, the SEC introduced Form CRS, or Customer/Client Relationship Summary, requiring broker-dealers and registered investment advisors to disclose the nature of the relationship, fees and costs, standards of conduct, and conflicts of interest, including any revenue-sharing or behind-the-scenes payments.
Reg BI will have a significant impact on broker-dealers who must adhere to higher standards when dealing with clients, but Form CRS represents only a small change for registered investment advisors that can add the documentation to the Form ADV that they already provide to clients. As a result, we can see greater competition from broker-dealers.
It’s also important to note that dual registrants who are both broker-dealers and investment advisors only need to comply with Reg BI while engaging in broker services — not when acting in their capacity as an investment advisor.
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The Reg BI risk alert lists the documentation necessary to ensure that broker-dealers are meeting the four core obligations under the new rules. For example, a schedule of fees, broker compensation methods, and a full list of proprietary products must be disclosed to clients before investment recommendations are made.
The four key areas of documentation include:
The Form CRS risk alert requires that broker-dealers and registered investment advisors show that they will have sent the summary to clients within one month of the compliance date. While this might be straightforward for RIAs that can add disclosures to Form ADV, broker-dealers must create new disclosures and send them out before the deadline.
The delivery and filings requirements depend on the client:
Despite the pending deadline, Morningstar surveyed 100 broker-dealers and found that one-third either didn’t start making preparations or were unsure if their firm had taken any ‘proactive steps’ to address their product line-up. These figures suggest that many companies could be behind the curve and at risk of potential enforcement actions.
If your firm is one of those that hasn’t made preparations, it’s time to start now because the deadline remains in place.
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