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New SEC guidance addresses how to resolve conflicts

What you need to know

  • The bulletin states that identifying and resolving conflicts should be a robust, ongoing process tailored to each conflict.
  • Hauptman says the guidance provides additional clarity on Reg BI and the Advisers Act fiduciary duty.
  • Lundy argues that the fact that the Bulletin addresses both the Reg BI and the fiduciary standard suggests a continuous combination of these two standards.

The Securities and Exchange Commission’s new guidance cautions firms that identifying and resolving conflicts under the Regulatory Best Interest and Advisers Act fiduciary standard “should not simply be a ‘check-the-box’ exercise, but should be consistent with a robust, ongoing process. Each conflict.”

In its new guidance released in response form Wednesday morning, SEC staff say “it is important for firms and their financial professionals to review their business models and relationships with investors to address conflicts of interest specific to them.”

Industry sources I contacted see the bulletin as helping brokers and advisors figure out “how” to identify and resolve conflicts.

This is the second set of Reg BI-related guidance issued by the Commission. The first was released in March and addressed account recommendations — such as rollovers.

The agency expects to release further guidance on broker and adviser responsibilities of care, including consideration of reasonably available alternatives and costs and risks.

“This is one of the first substantive guidance in Reg BI for fiduciary standards for the brokerage industry and investment advisers,” SEC Chairman Gary Gensler, Jim Lundy, partner and member of the Securities Enforcement and Litigation Practice, LLP, said in an email. “As such, brokerages and investment advisory firms will do well to give it a close study and apply it to their business model and compliance and monitoring programs.”

The FAQ, Lundy added, “may be viewed as helpful in providing more detail and guidance on the ‘how to’ aspect of accessing and maintaining compliance with these standards.”

Micah Hauptman, director of investor protection for the Consumer Confederation of America, agreed in another email that the guidance “will be helpful to firms and financial professionals as they consider how to resolve the various conflicts in their business models.”

The guidance, Hauptman said, “is consistent with Chair Gensler’s promise to provide additional clarity on Reg BI and the Advisers Act’s fiduciary duty requirements and to make more of them. We welcome it. “

The bulletin “clarifies that organizations should not approach conflicts of interest as a ‘box-checking’ exercise, and that how organizations resolve various conflicts depends on the nature and extent of those conflicts,” Hauptmann added.

Further, he continued, “It clarifies that there are certain conflicts of a nature and extent that the institutions cannot resolve in a way that allows the institutions or its financial professionals to provide advice or recommendations in the retail business. The best interest of the investors. In such cases, advice or recommendations that may be affected by conflicts should be avoided in order to avoid breaching the obligation to act in the best interests of retail investors.” Organizations need to take more aggressive action in resolving those conflicts, including preventing or eliminating them from giving.

‘Conflation’ of Reg BI and Fiduciary Standard?

The guidance is “designed to point out the similarities between Reg BI and fiduciary standards, rather than pointing out the differences,” Nicholas Morgan, partner at Paul Hastings, said in another email.

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