Being a broker dealer in today’s environment is a complicated and complex role. Included in this complexity is ensuring that your broker dealer operates with the highest ethical standards and providing the best possible considerations for your client. Having your client’s best interest at the forefront is essential. Suitability, in the context of broker dealer relationships, is a fundamental principle that ensures that investment recommendations and strategies align with the client’s specific financial situation, investment objectives, and risk tolerance. By doing this, the broker dealer helps to safeguard the client from unsuitable investments that may not match the client’s financials Read more about FINRA Rule 2111 – Suitability in Broker Dealer Relationships[…]
It is not an uncommon practice for a client to bring his or her money to a broker dealer for investing to grow their wealth. When this happens, how does your broker dealer invest it? Are there precautions in place to prevent your broker dealer’s registered representatives from mismanaging those funds? One type of mismanagement is excessive trading, also known as churning. This happens when a registered representative excessively buys and sells securities in a client’s account for the primary purpose of generating commissions instead of focusing on what is best for the client. While greed is usually the motivating Read more about Excessive Trading[…]
FINRA has recently given us all a new and improved Fund Analyzer tool. With the recent emphasis on Share Class selection, Regulation Best Interest (Reg BI) for broker-dealers, and the fiduciary duty of Registered Investment Advisers. Firms are encouraged to train their staff on using this new tool.
The new analyzer allows individuals to sort through and compare more than 30,000 products and run a wide variety of investment scenarios. The tool’s enhancements enable users to better calculate how a fund’s fees, expenses, and discounts impact the value of a fund over time.
The Securities and Exchange Commission adopted a new rule under the Securities Exchange Act of 1934 that established a standard of conduct for broker-dealers and the natural persons who are associated persons of a broker-dealer. It was established to enhance the broker-dealer’s standard of conduct to retail customers beyond the existing suitability obligation.
This standard of conduct takes critical principles from the underlying fiduciary obligations under the Investment Advisers Act of 1940. The SEC’s focus was regardless of whether a retail investor chooses a broker-dealer or an investment adviser, all retail investors should be entitled to a recommendation (by a broker-dealer) or advice (by an investment adviser) given in the best interest of the retail investor. It is essential to recognize that the term “retail investor” also includes Accredited Investors.
Advisers have a fiduciary obligation to recommend a share class that will provide their clients with the lowest overall expenses, based on anticipated transaction costs and holding periods. Moreover, if the Firm recommends mutual funds that carry 12b-1 fees when lower share class options exist, the Firm must make full and fair disclosure, including conflicts associated with making investment decisions in light of the receipt of 12b-1 fees; and selecting the more expensive 12b-1 fee paying share class when a lower-cost share class is available for the same fund. Share class selection is a regulatory priority. The SEC has indicated that examiners will conduct focused, risk-based examinations to assess whether investment advisers are meeting their obligations to
- Seek best execution;
- Disclose material conflicts of interest; and
- Maintain an effective compliance program.
Investment adviser should determine its approach for meeting these three obligations and train its personnel to comply with any policies, procedures, and guidelines governing share class selection.
FINRA publishes a monthly review of disciplinary actions taken against both firms and individuals. These disciplinary actions are useful tools to look for trends in violations and other sanctions. These trends can assist you in identifying weak areas in your firm’s compliance programs or surveillance. Below is a list of a few key actions from last month.