{"id":5965,"date":"2020-01-23T12:16:13","date_gmt":"2020-01-23T17:16:13","guid":{"rendered":"https:\/\/rixtrema.com\/blog\/?p=5965"},"modified":"2020-06-22T12:38:08","modified_gmt":"2020-06-22T17:38:08","slug":"dont-fall-blindly-into-these-3-conflicts-in-reg-bi","status":"publish","type":"post","link":"https:\/\/rixtrema.com\/blog\/dont-fall-blindly-into-these-3-conflicts-in-reg-bi\/","title":{"rendered":"Don&#8217;t fall blindly into these 3 conflicts in Reg BI"},"content":{"rendered":"\n<h2 class=\"wp-block-heading\" id=\"1\"><strong>Revenue-Sharing Conflicts<\/strong><\/h2>\n\n\n\n<p style=\"text-align: justify;\"><span style=\"font-weight: 400;\">&nbsp;Reg-BI represents a significant change in the SEC\u2019s regulation target. Revenue Sharing is the practice of an investment fund security sharing money back with broker-dealers who sell it to clients and it was not regulated by the SEC prior to Reg-BI. By Reg-BI\u2019s new standards, it exposes BDs to Best Interest violations.<\/span><\/p>\n<p style=\"text-align: justify;\"><span style=\"font-weight: 400;\">Specifically, the conflict of interest obligation eliminates many of the traditional means of disguising BDs may be forced to change or explicitly acknowledge revenue sharing arrangements to mitigate Reg-BI.&nbsp;<\/span><\/p>\n\n\n\n<p><a href=\"https:\/\/www.morningstar.com\/lp\/regbi-opaque-practices-paper\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\"><strong>Reg-BI may force revenue-sharing to change for BDs.<\/strong><\/a><strong>&nbsp;<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Brokers can no longer just follow FINRA\u2019s suitability standard because it did not impose many restrictions on revenue sharing.<\/li><li>Reg-BI strengthens the standard of conduct for brokers and the fees they can collect<\/li><\/ul>\n\n\n\n<p style=\"text-align: justify;\"><a href=\"https:\/\/www.morningstar.com\/blog\/2019\/11\/18\/regulation-bi.html\" target=\"_blank\" rel=\"noopener noreferrer\"><span style=\"font-weight: 400;\">Not all revenue-sharing payments create problems<\/span><\/a><span style=\"font-weight: 400;\">, but <\/span><b>brokers should be wary of 3 categories of payment-related conflicts<\/b><span style=\"font-weight: 400;\">:<\/span><\/p>\n<p><strong>1.Payments based on sales or assets:<\/strong><\/p>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The SEC prohibits sales quotas and bonuses tied to product sales<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">These conflicts need to be eliminated because mitigation seems to be impossible to justify.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><strong>2.Payments for services:&nbsp;<\/strong><\/p>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul style=\"list-style-type: circle;\">\n<li><span style=\"font-weight: 400;\">Platform or access fees act similarly to distribution fees paid as part of an expense ratio.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ol style=\"text-align: justify;\">\n<li style=\"list-style-type: none;\">\n<ol>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Education, training, and conference expenses to teach brokers about products may not cause conflict unless it is viewed as a reward.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Training and education could cause a subconscious bias as BDs tend to recommend products they are more knowledgeable about.&nbsp;<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The SEC\u2019s response to these payments will vary based on facts and circumstances.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ol>\n<\/li>\n<\/ol>\n<p><strong>3.Payments for recommended or preferred funds:&nbsp;<\/strong><\/p>\n<ul>\n<li><span style=\"font-weight: 400;\">Those paid for by asset managers or part of Robo-platforms<\/span><\/li>\n<\/ul>\n<ul>\n<li style=\"text-align: justify;\"><span style=\"font-weight: 400;\">These funds will create a conflict if the payment translates into a higher likelihood of recommendation despite the client\u2019s needs.&nbsp;<\/span><\/li>\n<\/ul>\n\n\n\n<p style=\"text-align: justify;\"><span style=\"font-weight: 400;\">It can not be stated enough &#8211; the conditions and circumstances surrounding the facts of each payment and recommendation will affect whether the SEC considers it a violation of the Reg-BI obligations. Fund expenses are a critical but only one consideration of a best-interest recommendation. Simply recommending the lowest-cost security or investment strategy does not necessarily satisfy the Care Obligation.<\/span><\/p>\n<p style=\"text-align: justify;\"><span style=\"font-weight: 400;\">Figure 1 illustrates common expenses investors pay for mutual funds and advises which payments may create a conflict of interest (<\/span><a href=\"https:\/\/www.morningstar.com\/lp\/regbi-opaque-practices-paper\" target=\"_blank\" rel=\"noopener noreferrer\"><span style=\"font-weight: 400;\">Morningstar<\/span><\/a><span style=\"font-weight: 400;\">). Figure 2 shows the common types of revenue-sharing arrangements and the conflicts they can present (<\/span><a href=\"https:\/\/www.morningstar.com\/lp\/regbi-opaque-practices-paper\" target=\"_blank\" rel=\"noopener noreferrer\"><span style=\"font-weight: 400;\">Morningstar<\/span><\/a><span style=\"font-weight: 400;\">). Since violations will vary case-by-case, BDS need to tread carefully and conduct a thorough review of their product and services list for conscious and unconscious conflicts of interest.&nbsp;<\/span><\/p>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"770\" height=\"561\" src=\"https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/01\/Figure-1-Disbursement-of-Common-Expenses-Investors-Pay-for-Mutual-Funds-and-Advice-Morningstar-min.png\" alt=\"Figure 1: Disbursement of Common Expenses Investors Pay for Mutual Funds and Advice (Morningstar)\" class=\"wp-image-5966\" srcset=\"https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/01\/Figure-1-Disbursement-of-Common-Expenses-Investors-Pay-for-Mutual-Funds-and-Advice-Morningstar-min.png 770w, https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/01\/Figure-1-Disbursement-of-Common-Expenses-Investors-Pay-for-Mutual-Funds-and-Advice-Morningstar-min-300x219.png 300w, https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/01\/Figure-1-Disbursement-of-Common-Expenses-Investors-Pay-for-Mutual-Funds-and-Advice-Morningstar-min-768x560.png 768w, https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/01\/Figure-1-Disbursement-of-Common-Expenses-Investors-Pay-for-Mutual-Funds-and-Advice-Morningstar-min-500x364.png 500w\" sizes=\"auto, (max-width: 770px) 100vw, 770px\" \/><figcaption>Figure 1: Disbursement of Common Expenses Investors Pay for Mutual Funds and Advice (Morningstar)\n<\/figcaption><\/figure><\/div>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1012\" height=\"127\" src=\"https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/01\/Figure-2-Common-Types-of-Revenue-Sharing-Arrangements-and-the-Conflicts-They-Can-Present-Morningstar-min.png\" alt=\"Figure 2: Common Types of Revenue-Sharing Arrangements and the Conflicts They Can Present (Morningstar)\" class=\"wp-image-5967\" srcset=\"https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/01\/Figure-2-Common-Types-of-Revenue-Sharing-Arrangements-and-the-Conflicts-They-Can-Present-Morningstar-min.png 1012w, https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/01\/Figure-2-Common-Types-of-Revenue-Sharing-Arrangements-and-the-Conflicts-They-Can-Present-Morningstar-min-300x38.png 300w, https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/01\/Figure-2-Common-Types-of-Revenue-Sharing-Arrangements-and-the-Conflicts-They-Can-Present-Morningstar-min-768x96.png 768w, https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/01\/Figure-2-Common-Types-of-Revenue-Sharing-Arrangements-and-the-Conflicts-They-Can-Present-Morningstar-min-500x63.png 500w, https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/01\/Figure-2-Common-Types-of-Revenue-Sharing-Arrangements-and-the-Conflicts-They-Can-Present-Morningstar-min-800x100.png 800w\" sizes=\"auto, (max-width: 1012px) 100vw, 1012px\" \/><figcaption>Figure 2: Common Types of Revenue-Sharing Arrangements and the Conflicts They Can Present (Morningstar)<\/figcaption><\/figure><\/div>\n\n\n\n<p style=\"text-align: justify;\">As you can see, there is some nuance to the Reg-BI Changes. Please contact our Client Success Team with any questions or concerns about Reg-BI at <u><a href=\"mailto:clientsuccess@rixtrema.com\" target=\"_blank\" rel=\"noopener noreferrer\">clientsuccess@rixtrema.com<\/a><\/u>. You can also read more about Reg-BI on our <u><a href=\"https:\/\/rixtrema.com\/blog\/category\/regulation-best-interest\/\" target=\"_blank\" rel=\"noopener noreferrer\">blog<\/a><\/u> and learn about our Financial Planning Software Platform.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/rixtrema.net\/regbioptimizer\/index?source=Colin-23-01\" target=\"_blank\" rel=\"noopener noreferrer\"><img loading=\"lazy\" decoding=\"async\" width=\"542\" height=\"100\" src=\"https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/05\/REGBIOPTIMIZER1.png\" alt=\"\" class=\"wp-image-6468\" srcset=\"https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/05\/REGBIOPTIMIZER1.png 542w, https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/05\/REGBIOPTIMIZER1-300x55.png 300w, https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/05\/REGBIOPTIMIZER1-500x92.png 500w\" sizes=\"auto, (max-width: 542px) 100vw, 542px\" \/><\/a><\/figure>\n\n\n","protected":false},"excerpt":{"rendered":"<p>Revenue-Sharing Conflicts &nbsp;Reg-BI represents a significant change in the SEC\u2019s regulation target. Revenue Sharing is the practice of an investment fund security sharing money back with broker-dealers who sell it to clients and it was not regulated by the SEC prior to Reg-BI. By Reg-BI\u2019s new standards, it exposes BDs to Best Interest violations. Specifically,&#8230; <\/p>\n<div class=\"clear\"><\/div>\n<p><a href=\"https:\/\/rixtrema.com\/blog\/dont-fall-blindly-into-these-3-conflicts-in-reg-bi\/\" class=\"excerpt-read-more newsstand-button\">Read More<\/a><\/p>\n","protected":false},"author":9,"featured_media":5968,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[300],"tags":[293,148,277,198,117],"class_list":["post-5965","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-regulation-best-interest","tag-bds","tag-morningstar","tag-regulation-best-interest","tag-sec","tag-sec-form-adv"],"jetpack_featured_media_url":"https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/01\/-\u0438\u043c\u0435\u043d\u0438-1-1-e1592847426755.jpg","yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v15.9.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Don&#039;t fall blindly into these 3 conflicts in Reg BI<\/title>\n<meta name=\"description\" content=\"Reg-BI represents a significant change in the SEC\u2019s regulation target. 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