Does Reg BI allow Placement fees? (Only you can decide!)

In the spirit of this website, I am going to present the industry side, the side of this claimant and my opinion as a retail customer. Blackstone documents at bottom of this page.

A placement fee is very common when a broker sells you an alternative investments. They may say, "the charge is a placement fee of 1% upfront and a trail of 85 basis points." In the vast majority of the cases, the broker has the option of charging you "0" upfront up to a maximum of 2% -3.5% depending on the investment. Reg BI says that any charge that adds an extra expense is prohibited.

Below is the legal basis but it seems to me that it is really common sense. Placement fees add an extra expense to a security. They also influence your broker to put you in the product that pays him the most and then, when he needs another placement fee in 2-3 years, to sell the original product and sell you something else that also comes with a new placement fee. 

Without the placement fee, they would almost certainly recommend less of an allocation to product “x.” Very possibly, product "x" is only on the platform because the broker makes extra.   

Can a retail customer waive the protections of Regulation Best Interest?  No. A broker-dealer must  comply with Regulation Best Interest. A failure to comply with all four component obligations is a violation of Regulation Best Interest, and a retail customer, which includes a natural person or her non-professional legal representative, cannot waive or agree to waive the protections afforded under Regulation Best Interest. (Posted February 11, 2020)- Reg BI FAQ’s

Second, under the Care Obligation, a broker-dealer must exercise reasonable diligence, care, and skill when making a recommendation to a retail customer. The broker-dealer must understand potential risks, rewards, and costs associated with the recommendation. The broker-dealer must then consider those risks, rewards, and costs in light of the customer’s investment profile and have a reasonable basis to believe that the recommendation  is in the customer’s best interest and does not place the broker-dealer’s interest ahead of the retail customer’s  interest. A broker-dealer should consider reasonable alternatives, if any, offered by the broker-dealer in determining whether it has a reasonable basis for making the recommendation. Whether a broker-dealer has complied with the Care Obligation will be evaluated as of the time of the recommendation (and not in hindsight). When recommending a series of transactions, the broker- dealer must have a reasonable basis to believe that the transactions taken together are not excessive, even if each is in the customer’s best interest when viewed in isolation    (page 729) 

The claimant is of the opinion that there is nothing more reasonably available than the same exact security without a placement fee.

Relatedly, we stated that a broker-dealer could not meet the Care Obligation through disclosure alone. 629  (page 278)

( Note 629 -page 280) Id. at 21612-21613 (further explaining that “where a broker-dealer is choosing among identical securities with different cost structures, we believe it would be inconsistent with the best interest obligation for the broker-dealer to recommend the more expensive alternative for the customer, even if the broker-dealer had disclosed that the product was higher cost and had policies and procedures reasonably designed to mitigate the conflict  under the Conflict of Interest Obligation, as the broker-dealer would not have complied with the Care  Obligation.  Such a recommendation, disclosure aside, would still need to be in the best interest of a retail customer, and we do not believe it would be in the best interest of a retail customer to recommend  a higher-cost product if all other factors are equal.”) (internal citations omitted).

If you paid a placement fee, you can ask for the commissions and fees back with interest. You can ask for your money back. You can ask for what you would have gotten in a well-managed portfolio. You can ask for any losses to be reimbursed.

I am trying to make the website "consumer empowerment" and not "beat up the industry." I know you are going to say, what is the industry relying on to charge a placement fee? Here is the language from Blackstone. BREIT and BCRED have been designed with optional placement fees which Merrill Lynch uses to incentivize themselves and the local broker to sell Blackstone. They were sued in FINRA by a customer who agreed to pay a placement fee and he is arguing that neither Blackstone nor Merrill Lynch were allowed to provide / charge him a placement fee and he is protected by Reg BI.

You can see below that Blackstone is saying that placement fees are okay because Blackstone and Merrill disclosed them. Blackstone is also saying because they are one step removed from the customer, it is not their problem. In this case Merrill Lynch put 100% of the client's money into BREIT and BCRED. This was about 100% of his liquid assets.

If placement fees are inconsistent with Reg BI, what is going to happen to the liquidity of these semi-liquid funds. A large part of the inflows may be coming from brokers getting paid extra because of the placement fees. In my not scientific research, about 40% of BREIT is in shares classes that charge an optional placement fee. If this single arbitrator decides in Feb. that placement fees are inconsistent with Reg BI, it may impact how quickly Blackstone and others can provide liquidity when current investors want to get out.

People reading this are going to say, well, isn't anyone watching the store? Who makes these decisions? Reg BI gives the power to the Retail Customer. If you read this and you were charged a placement fee and you think Reg BI prohibits placement fees, you are the only vote that matters.

Blackstone hired Ropes and Gray for a $5,000 claim. Merrill Lynch hired Morgan Lewis for a $5,000 claim. They have no greater ability to read English than you do.

You can see the regulation right here and ask your broker why they charged you a more expensive version of the same thing.

Blackstone says: "Reg BI does not prevent placement fees from being charged—it simply requires consideration of those fees in connection with the best interest analysis and disclosure of those fees," (17 C.F.R. § 240.15l-1(a)(2)(i)(A)(2))

Blackstone is relying on disclosure. However, as we see above, Reg BI specifically says disclosure is not enough. Merrill asks their customers if they are willing to pay an optional placement fee. Many customers say no, many customers, for a variety of reasons, says yes. The customer thinks because they agreed to it that the placement fee was allowed. The customer has no idea that Reg BI is a Standard of Conduct and the broker is prohibited from charging extra for the same security- even when they disclose the extra charge.

JPM paid $15,000,000 under Reg BI because they put customers in a more expensive share class when a less expensive share class was available. (10/31/24) (SEC 3-22279) When recommending the Clone Mutual Funds, JP Morgan Securities and its registered representatives failed to consider the costs associated with the Clone Mutual Funds as opposed to the less expensive Clone ETFs and failed to have a reasonable basis to believe that the recommendations were in the best interest of JP Morgan Securities retail brokerage customers.

You now have the language from the regulation itself and the rationale from Blackstone. You can make your own decision.

(You also have my opinion as a retail customer. No one has any expert knowledge. It is a new law and it gives the power of decision to the retail customer. The point of this website is to give you enough information to form your own opinion and protect your investments)