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Advisors See SEC's Reg BI as a 'Step in the Right Direction'

Despite some criticism that the rules don't go far enough, most advisors are on board with the new standards of conduct.

The approval Wednesday of the Securities and Exchange Commission’s Regulation Best Interest drew negative reactions from some politicians, investor advocates and industry groups, but many advisors view it as a good starting point for improving the wealth management industry’s standards of conduct.

"We are an industry that helps millions of people each year to better themselves. If this helps to create clarity for a few more clients, then I am not opposed to it," said Nicholas Dostal, a financial advisor at Castlerock Financial Management Group, a hybrid broker/dealer and registered investment advisor, in an email. "In the end it is more paper and compliance work. To stand out as the premier profession with the highest standards of care—I am on board."

Dostal said he doesn't see the new rules dramatically changing how his company does business. Like most other b/ds, he said, Castlerock began preparing for a requirement that brokers act in the best interest of clients after the Department of Labor created its own fiduciary rule. The DOL's rule failed to survive a court challenge last summer, but Congress mandated last spring that the SEC evaluate and consider new rules for advisors.

Wednesday was a "step in the right direction" and therefore a good day for retail investors, according to Cynthia Zalewsky, president of Saratoga Investment Solutions, a fee-only RIA.

Zalewsky believes all advisors should be held to a fiduciary standard and felt the new rules could have gone further to achieve that. But she also said the changes made were "essential." She praised the rules limiting sales competitions and noncash rewards tied to selling specific securities. Incentives like that "should be absolutely banned as there is no way to avoid a conflict of interest, and the policy itself invites negligence," she said.

"All in all, I feel that this is a good starting point to tackle an extremely complex issue," added Rajpal Arulpragasam, the president and CEO of Archetype Risk Advisors.

Jeff Davis, the managing partner of Falcon Financial Management in Gainesville, Fla., said he was in favor of drawing distinctions between someone providing investment advice and one selling a product. He believes the rule package will help him differentiate himself as a fiduciary.

“Product sales and the advisory business are not the same thing,” he said. “When the fiduciary issue first came out, I was one of the first to become an Accredited Investment Fiduciary. I thought that might've been a wasted exercise, but now I think it is going to be even more important.”

The commission voted to pass four items: Regulation Best Interest (Reg BI), which will set a standard of conduct for broker/dealers; a relationship summary, Form CRS; an interpretation reaffirming the fiduciary duty for investment advisors; and an interpretation of “solely incidental,” a prong of the Investment Advisers Act of 1940.

The rule package did not change dramatically from the one proposed about a year ago, with the exception of the "solely incidental" interpretation, which was not part of the original proposal. 

Reg BI and Form CRS will go into effect 60 days after those rules are published in the Federal Register. But firms will have a transition period until June 30, 2020, to comply. The Advisers Act interpretations will take effect as soon as they’re published.

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