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Edward Jones and LPL are Reviewing Fees, Products and Potential Conflicts To Prepare for SEC Reg BI

By Rita Raagas De Ramos May 17, 2019

The Department of Labor’s now vacated fiduciary rule is helping Edward Jones and LPL Financial Holdings prepare for the SEC’s proposed Regulation Best Interest.

“What we’ve tried to do is learn from our prior experience,” Chris Lewis, general counsel at Edward Jones, said Thursday at Finra’s annual conference in Washington D.C.

In the case of the DOL rule, one of the biggest lessons was how “the time to implement was really short,” he said.

“The question we’ve asked internally is what can we learn from that experience? What elements do we think will remain regardless of how these rules will be written? How do we get ahead of it?” according to Lewis.

The proposed Reg BI package establishes a best interest standard of conduct for broker-dealers, interprets the fiduciary standard for investment advisors, and creates a new Customer Relationship Summary form aimed at clearly stating to clients if they are dealing with a broker-dealer or an investment advisor.

“As we think of our clients and how we best serve them, we think about 3Ds” — determine, demonstrate and document, Lewis said.

First, determine if an investment recommendation is indeed in the best interest of a client, according to Lewis.

Second, demonstrate to the client and regulators that the recommendation was in their best interest of the client. Third, document that the recommendation was in the best interest of the client, Lewis explained.

To prepare for Reg BI, Edward Jones is reviewing its cost and fee structure “to make it as transparent as best we can” and identifying any conflicts of interest, according to Lewis.

Meanwhile, Michelle Oroschakoff, chief legal and risk officer at LPL Financial Holdings, said at the same conference the firm is “leveraging a lot of what we did for DOL to get better prepared.”

One of the things LPL did to prepare for the DOL rule was to review its “entire line up of products and all of our pricing,” Oroschakoff said.

LPL’s “pricing already adjusted to reduce conflict,” she said. “We aligned our pricing more tightly. We’ll continue to do that.”

Oroschakoff said LPL is also reviewing potential conflicts – both direct and indirect compensation – and checking if its disclosures are “good” enough for Reg BI.

(Getty)

One of the obligations under the proposed Reg BI is the conflict of interest obligation. It requires broker-dealer firms to establish, maintain and enforce policies and procedures reasonably designed to identify — and then, at a minimum, to disclose and mitigate, or eliminate — material conflicts of interest arising from financial incentives. Other material conflicts of interest must be at least disclosed.

“If anybody is waiting for the final rule to start preparing, I would suggest that since we already know a lot about what’s going to be in the final rule now, there’s plenty that you can be preparing for now,” Oroschakoff said. “You may have to tweak a little bit later but you’ll be 90% there.”