Does Reg BI allow sales loads? (Only you can decide!)
- rd12661
- Sep 5, 2025
- 9 min read
Updated: 2 days ago
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 sales load is very common when a broker sells you an alternative investments. They may say, "the charge is a sales load/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/sales loads 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.
JP Morgan Securities identified approximately 10,516 impacted customers that paid a total of approximately $14.03 million in up-front sales charges, contingent deferred sales charges, and higher ongoing fees and expenses from purchases of the First and Second Clone Mutual Funds recommended by JP Morgan Securities and its registered representatives.
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)
If you see below, you will see that FINRA specifically mentions sales loads (which are placement fees) as a factor that has to be considered when a broker recommends a security. The entire industry is taking continuing education on Reg BI and violating it every single day. This is from the 2025 continuing education module from FINRA.
The below people of tremendous integrity and wealth take the continuing education
classes every year. They figure the attorneys must have figured it out. You decide.
Jamie Dimon: CEO JPM: CRD: 209532
Steve Schwarzman CRD: 861435
Mark Rowan CRD: 1410799
Lindsay Hans (Head of ML Wealth Management) CRD 4429443
Eric Schimpf (Head of MLWM) CRD 2494318
Jed Finn- (Head of MSWM) 5658048
Ted Pick - CEO Morgan Stanley : CRD: 2083303
Howard Marks- Oaktree (Best Memo writer ever): CRD 1864172
Andrew Seig: Citi wealth management CRD 4218535
And so on......
Case Law on expensive vs. cheap share classes. The Share class initiative has been going on Since 2019. There is extensive Jury and SEC penalties. When you are a Fiduciary, and Reg BI is a fiduciary, you have to choose the cheapest share class. Disclosure doesn't matter.
SEC Share Class Initiative Returning More Than $125 Million to Investors
Reflecting SEC’s Commitment to Retail Investors, 79 Investment Advisers Who Self-Reported Advisers Act Violations Agree to Compensate Investors Promptly, Ensure Adequate Fee Disclosures
Jury Trial (Eastern District of PA) in favor of SEC 1. From at least August 15, 2014, through December 2018 (the “Relevant Period”), Ambassador Advisors—an investment adviser registered with the Commission—and Bostwick, Kauffman, and Young—part owners, executives, and investment adviser representatives of Ambassador Advisors—unlawfully invested their advisory clients in mutual fund share classes with 12b-1 fees when lower-cost mutual fund share classes were available to the clients.
They violated their clients’ trust repeatedly over a prolonged period of time, did so with scienter, and have failed to take responsibility for their conduct. JOHN M. GALLAGHER
United States District Court Judge Eastern District of Pennsylvania
Jury trial requested (Colorado) in favor of SEC- against Cetera During the Relevant 12b-1 Period, Defendants’ clients paid millions of dollars in unnecessary fees and they received at least $10 million more than if the client’s assets were invested in the lower-cost share classes
Michael E. Hegarty United States Magistrate Judge
In October 2022, the SEC obtained a final judgment against Cetera Advisors LLC and Cetera Advisor Networks LLC in the U.S. District Court for the District of Colorado, following allegations of defrauding advisory clients through undisclosed fees. The case was resolved via consent to judgment, not a jury trial
Cetera was kicked out of FINRA because of the fraud and had to reapply.
Date: April 8, 2024: In the Matter of the Continued Membership of Cetera Advisors LLC with
FINRA
On December 9, 2022, Cetera Advisors LLC (the “Firm”) submitted to FINRA a Membership Continuance Application (“MC-400A” or “the Application”). The Application seeks to permit the Firm, a FINRA member subject to a statutory disqualification, to continue its membership with FINRA.
The Statutorily Disqualifying Event
The Firm is subject to a statutory disqualification because of an October
13, 2022 final judgment (the “Final Judgment”) entered by the United States
District Court for the District of Colorado. The Final Judgment, among other
things, permanently enjoined the Firm from engaging in any transactions,
practices, and courses of business that operate as a fraud or deceit upon any client
or prospective client and from violating Section 206(4) of the Investment
Advisers Act of 1940 (“Advisers Act”) and Rule 206(4)-7 thereunder.
Pursuant to the Final Judgment, which the Firm consented to without admitting or denying any allegations, the court ordered the Firm to pay a total of $7,605,470, composed of disgorgement of $5,614,509, prejudgment interest of $990,961, and a civil penalty of $1 million.
Multiple cases of using expensive share classes when cheap share classes are available.
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