Reg. BI – The Conflict of Interest Obligation, Part 4

Under Reg. BI, do some conflicts of interest put retail customers in such a difficult position that they can’t be disclosed or mitigated away?[1]

The SEC says you must develop written policies and procedures reasonably designed to eliminate sales contests, sales quotas, bonuses and non-cash compensation that are based on the sales of specific securities and specific types of securities within a limited time. These practices, when coupled with a time limitation, create high-pressure situations for associated persons to engage in sales conduct contrary to the best interest of retail customers.

This requirement does not apply to compensation practices based on, for example, total products sold, or asset growth or accumulation, and customer satisfaction.

This elimination requirement would not prevent a broker-dealer from offering only proprietary products, placing material limitations on the menu of products, or incentivizing the sale of such products through its compensation practices, as long as the incentive is not based on the sale of specific securities or types of securities within a limited period of time.

The elimination requirement is not intended to prohibit:

• training or education meetings, provided that these meetings are not based on the sale of specific securities or types of securities within a limited time;

• receipt of certain employee benefits by statutory employees, as the SEC does not consider these benefits to be non-cash compensation for purposes of Reg. BI.

[1] In Cady’s Regulation Best Interest series, we’ll largely be breaking down the SEC’s Small Entity Compliance Guide into smaller chunks and, we think, easier language.