New SEC Regulations for Broker-Dealers Coming in June

By Alma Piscitello, EVP, Relationship Management at Ultimus Fund Solutions

>New SEC Regulations for Broker-Dealers Coming in June

New SEC Regulations for Broker-Dealers Coming in June

By | 2020-04-07T09:35:06-05:00 March 24, 2020|Compliance, Distribution|

During the current market volatility and uncertain times, investment firms and asset managers must be vigilant to remember their regulatory obligations and review pending guidelines to assist with all aspects of financial services. Currently, implementation of Regulation Best Interest (Reg BI) compliance is still on course for June 30, 2020. 

The rule establishes new standards for Registered Investment Advisers (RIAs) and Broker-Dealers (B-Ds) when recommending securities transactions or investment strategies.

Overview of Regulation Best Interest
Regulation Best Interest (BI) is a Securities and Exchange Commission (SEC) rule adopted in 2019 under the Exchange Act that requires B-Ds to act in the best interest of their retail customers when making recommendations concerning securities transactions or investment strategies involving securities.

This effectively upgrades the suitability standard to a quasi-fiduciary standard that requires B-Ds to, among other things, clearly identify any potential conflicts of interest and financial incentives the broker-dealer may have with those recommendations. B-D’s must act with “reasonable diligence, care, and skill” in making recommendations, which includes understanding the potential risks and rewards, as well as costs, and ensuring that they do not put their interests ahead of the retail customer’s interests.

All registered broker-dealers must begin complying by June 30, 2020.

Key Facts to Know:

  • Regulation requires broker-dealers to act in the best interest of their retail customers when making recommendations concerning securities transactions, or investment strategy involving securities.
  • Regulation requires that broker-dealers place their clients’ interests ahead of their own.
  • Brokers must consider costs, but it is not the exclusive factor for assessing best interest.

Why does this matter to investment managers of Mutual Funds and ETFs?
Although Reg BI does not apply directly to mutual funds (which are not retail clients), mutual funds are among the broad menu of investment strategies and products from which investment professionals can choose when making recommendations to their clients.

Reg BI therefore may contribute to fee compression as product sponsors seek to make their offerings more attractive to financial professionals who must consider product costs as part of their evaluation of a client’s best interests. Indeed, distribution channels may be foreclosed to products that are deemed too costly. Thus, Reg BI could reshape product construction and pricing models to better fit B-Ds’ product selection needs.

The chart below identifies the potential pros and cons the new Reg BI rule may have for financial advisers, investment managers, and clients:

General industry ‘buzz’ suggests that Reg BI implementation could serve as a further catalyst for RIAs and B-Ds to purchase exchange-traded funds (ETFs) for their clients, which are sometimes viewed as potentially lower-priced offerings of their cousins in the mutual fund wrapper. This also could propel advisers to launch their own ETFs due to the additional fee pressures and other factors in an increasing competitive market.

At the end of the day, upcoming Reg BI regulations are designed to bolster investor protections and better inform clients. But it remains to be seen how the new rule planned for June will impact product offerings overall in a challenging and changing financial market.

Ultimus partners with its investment manager clients to provide customized services throughout the entire life cycle of registered funds. The company helps guide investment advisers through strategy and product development, SEC filing, launching, and fund distribution, while also providing ongoing administration, accounting, reporting, and compliance. To learn more, visit and fill out the Contact Us form.

Ultimus Fund Solutions, LLC provides fund distribution services through its affiliated broker-dealers: Ultimus Fund Distributors, LLC. and Northern Lights Distributors, LLC. Each of which is a registered broker-dealer and member of FINRA. ETFs and Mutual Funds are subject to market risk, including loss of principal.

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