- CYA Data
- Sep 6
- 5 min read
Updated: Oct 4
Reg BI upgraded the Disclosure rules to normal!
I want to set the stage here. You don't need to be a securities attorney to be an expert in Reg BI. You need to be a retail customer. If you were ever summoned for jury duty and you have a 401k or IRA or a regular taxable account at Fidelity or Schwab or Merrill Lynch, you are a Reg BI expert. Reg BI has very few definitions and all of them are defined by the retail customer. I list them below in the rule but your wealth manager has to tell you all important information, in a "full and fair" way that is sufficiently specific so that you can make an informed decision. If you can handle that, you are a Reg BI expert. If you are a plumber or a art history professor or a 4th grade English teacher, you are now a Reg BI expert.
This is from the BREIT (Blackstone) prospectus. The law is still new and as you will see from this website, the industry is ignoring it. The people that hold the cards are the retail customers. As Regulation Best Interest became effective on June 30, 2020, no administrative or case law currently exists under Regulation Best Interest and the full scope of its applicability is uncertain.
For decades, Wall Street had disclosure rules, which really meant “let’s disclose as little as possible”- Reg BI upgraded that. When you go out to dinner, you know what it costs, when you buy a shirt, you know what it costs. Only on Wall Street, did you have a funny feeling that something wasn't right.
Your broker has to tell you everything important- including what their commission/incentive is-and offer you the opportunity to put the product in an unconflicted advisory account. The person who decides if they told you everything is…YOU!- If you think they were deceptive, THEY WERE DECEPTIVE.
The standard of "important" is the retail customer.
If they didn't tell you what their commission was and you think they sold you a product because they got paid extra, you have recourse. Unfortunately, many brokers sell investments because they get paid extra by the promotor. The deals don't always lose money, they just don't do as well as they should. You can get "prudent man" damages when that happens.
Reg BI requires the broker to get an informed decision as to whether he puts the investment in an advisory or a brokerage account.
Once you see how much brokers make in upfront commission in a brokerage account, (on certain products), a lightbulb will go off.
If you are a dually licensed financial professional, you need to make a best interest evaluation taking into consideration the spectrum of accounts you offer (i.e., both brokerage and advisory accounts, subject to any eligibility requirements such as account minimums).[Rule page 10)
(Reg BI rule Page 34): Recommendations of account types, We are modifying Regulation Best Interest to expressly apply to account recommendations including, recommendations to open a particular securities account (such as brokerage or advisory) Expressly :- Explicit, stated clearly and in detail, leaving no room for confusion or doubt.
You probably like and trust your broker. Brokers will say "there is no fee", or " you don't pay anything" -or similar half-truths. You know they are getting paid somehow, but you don't know how much and it is uncomfortable to ask. Unfortunately, too many people found out that their money did poorly, or they can't get out or there was some type of catch.
Reg BI understands that dynamic and puts the burden on the broker to make sure they receive from you an informed decision. No more burying information inside documents-no more being deceptive. No telling customers a year later that the information was on page 476 in the 8 point font. (That is not "full and fair") They have to make sure you understood all the important information. They can only take an order from you if it was an informed decision.
Regulation Best Interest also explicitly requires that disclosures be “full and fair,” and thus that a broker-dealer must provide sufficient information to enable a retail customer to make an informed decision with regard to a recommendation… By explicitly requiring that broker-dealers provide sufficient information to enable retail investors to make an informed decision with regard to a recommendation, Regulation Best Interest imposes a minimum standard on disclosures (page 552 of rule)
Furthermore, we are modifying the Disclosure Obligation to explicitly require broker dealers to provide “full and fair” disclosure of material facts, rather than requiring broker-dealers to “reasonably disclose” such information. (page 35 of rule) There was so much discussion that the disclosure on the original Reg BI release was upgraded from “reasonably disclose” to “full and fair disclosure of ALL material facts.”
The Disclosure Obligation requires the disclosure of all material facts related to the
scope and terms of the relationship with the retail customer. (page 132 of rule) ALL is highlighted in rule
The Disclosure Obligation requires the disclosure of all material facts related to the scope and terms of the relationship with the retail customer. The standard for materiality for purposes of the Disclosure Obligation is consistent with the one the Supreme Court articulated in Basic v. Levinson. Specifically, a fact is material if there is “a substantial likelihood that a reasonable shareholder would consider it important.” In the context of Regulation Best Interest, the standard is the retail customer, (page 132 of rule)
Below are two Wall Street penalties which spell out the point behind Reg BI. Brokerage accounts are now Fiduciaries.
Cadaret Grant- 6 million penalty- 8/12/24……has an obligation to disclose all material facts to its advisory clients relating to the advisory relationship, including any conflicts of interest between itself and its clients. To meet this fiduciary obligation, Cadaret Grant was required to provide its advisory clients with full and fair disclosure that was sufficiently specific so that its clients could understand the conflicts of interest concerning Cadaret Grant’s investment advice and have an informed basis on which to consent to or reject the conflicts.
Aventura Capital 9/6/22 900,000 penalty: As an investment adviser, Aventura Capital was obligated to disclose all material facts to advisory clients, including any conflicts of interest between the adviser and its clients, that could affect the advisory relationship and how those conflicts could affect the advice Aventura Capital provided its clients. To meet this fiduciary obligation, Aventura Capital was required to provide advisory clients with full and fair disclosure that was sufficiently specific so that the advisory clients could understand the conflicts of interest concerning Aventura Capital’s advice about investing in different share classes of mutual funds or money market funds, and could have an informed basis on which advisory clients could consent to or reject the conflicts.