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By George C. Miller, Esq. and Domanic Glenn of Shustak Reynolds & Partners, P.C. posted on Thursday, July 9, 2020.

George C. Miller

George C. Miller


Location: San Diego, California
Phone: (619) 696-9500 (Ext. 105)
Direct: (619) 501-8270
Email[email protected]

The SEC's Regulation Best Interest (Reg BI) under the Securities Exchange Act of 1934 establishes a "best interest" standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendations of types of accounts. The new rule, which formally took effect June 30, 2020, is viewed as a replacement for the Department of Labor’s (“DOL”) previous, and now dead, fiduciary rule.  One of many objections from the financial industry to the DOL fiduciary rule were the significant limitations it placed on the ability to collect fees and commissions in connection with retirement accounts.

On July 6, 2020, following the implementation of Reg BI, the DOL released a Notice of Proposed Class Exemption proposal to provide exemptions under ERISA - the Employee Retirement Income Security Act – and Internal Revenue Code of 1986, expressly allowing investment fiduciaries to receive compensation and engage in principal transactions in connection with retirement accounts.  Under the new proposal, investment fiduciaries would be allowed to receive compensation in the form of commissions, 12b-1 fees, and revenue sharing when working with 401(k) plans and individual retirement accounts (IRAs).  As stated in the proposal, the exemption would “apply to registered investment advisers, broker-dealers, banks, insurance companies, and their employees, agents, and representatives that are investment advice fiduciaries,” acting in the client’s best interest. 

Financial advisers must adhere to conduct standards, including earning reasonable compensation, not making misleading statements, and disclosing to customers they are acting as fiduciaries.  SEC Chairman Jay Clayton commented that the “proposed exemption announced [June 29, 2020] reflects in part the Commission’s constructive and ongoing engagement with the Department,” commending the DOL proposal.

Not all agree with the loosened restrictions on compensation.  In a letter sent to the DOL on July 8, 2020, 21 consumer and investor advocacy groups pressed the agency to extend the time period for public input from 30 to 90 days, to allow additional time for comment.  Critics claim that the recent actions taken by the DOL are not enough to control broker conflicts of interest, and not providing the deadline extension would show bad faith:

“Thirty days is an insufficient amount of time to truly digest and dissect the many complex and highly technical issues that this rulemaking raises.  These include, for example, how the reinstatement of the 1975 five-part test for determining who is an investment advice fiduciary will impact retirement savers and providers of retirement investment advice, how the proposed exemption would interact with the reinstated definition of investment advice fiduciary, how the proposed exemption’s conditions would be satisfied by various firms, how firms’ implementation would affect retirement savers, directly and indirectly, and how the exemption’s conditions would be interpreted and enforced.” The DOL has also reinstituted the five-part ERISA test to determine who is a fiduciary."

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. 
We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. 
Partner George C. Miller can be reached in the firm’s San Diego office at (619) 696-9500. 

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