Reg BI – The Disclosure Obligation

By Oyster Consulting LLC

Magnetic Field Lines

In this episode, Oyster’s Lance Whittemore and other experts discusses the Regulation Best Interest Disclosure Obligation – what it means for broker-dealers, advisors and dual registrants. Topics include disclosure and conflict examples, as well as Form CRS requirements.


Speaker 2: 0:06

Welcome to this week serving of Oyster Stew, a mix of financial services, commentary and insight. Each week we will discuss what is happening in the industry based on what we see as we work with regulators and clients. We hope you come away with the knowledge and tools to help you make the best decisions for your firm’s future. You can learn more about oyster consulting and the value we can add to your firm by going to our website,

Polly Cordle: 0:34

Welcome to our latest episode of Oyster Stew and this week we are on our 4th Reg Bi podcast, and today I think our focus is the disclosure obligation – is that right?

Nikki Brinkerho: 0:49

I think that’s right, Polly.

Polly Cordle: 0:52

My name is Polly Cordle. I am a Managing Director at Oyster and I am joined by Nikki Brinkerhoff , one of our Associate Directors and Lance Whittemore, of one of our Senior Consultants. Now, as I understand it, and you guys will probably correct me because I’m probably wrong but most firms when include their disclosures in the new Form CRS, is that correct?

Lance Whittemor: 1:16

That’s right, Pauly.

Polly Cordle: 1:18

All right . So I’m doing pretty good so far. Lance, I know you work with a lot of investment advisory firms and they have their ADV brochures. Is this going to be similar to an ADV brochure? Anything kind of the same between the forum and the brochure?

Lance Whittemor: 1:34

Yeah, Polly. For investment advisers who are already a pure fiduciary, t his is certainly a more st raightforward p rocess than it is for the broker dealer community. If firms like that have stayed current on their conflict inventories and kept their compliance manual and Form ADV updated to reflect the business practices they’re in. And if they reviewed their advisory agreements to ensure that they include all the ways that they earn fees in a r elationship, th en t h ey’ve g o t a r eally go od s t art o n finishing this process. It’s just different enough though, so that it is a helpful exercise for an overall compliance program. It’s always a good way to examine your own practices and consider how you want to disclose those, and if they’re disclosing it in a g ood way, to put those practices in context against your overall client relationship.

Polly Cordle: 2:27

All right , well thank you. We know like Lance said , this rule isn’t just about advisory firms, it’s about all kinds of firms. So are there differences across the different kinds of firms about how they’ll have to do their disclosures and what types of disclosures they should include?

Nikki Brinkerho: 2:44

Well, Polly, I think for all firms it’s different because every firm has a different compensation structure, has different product partners, has internal partners versus external partners. So, like Lance said, being able to conduct an analysis, understand where and how your business works and then properly disclose it is going to be different for every firm. A hybrid firm that does nothing but retail customers is going to have a whole different- looking disclosure then an institutional firm that serves retail customers as an accommodation. So each one of those firms, between the inventory of their disclosures, like Lance said, conducting that gap analysis – is going to be a different exercise for both.

Polly Cordle: 3:36

So Lance, give me one or two of the top things you think every firm should really have on our minds when they go about making these disclosures. It seems like it could be a, a big task to take on to think about all of the things that you should include in your disclosure. So give me just a couple things that can get them started and get them going in the right direction.

Lance Whittemor: 4:00

Certainly. I think N ikki really made a very good point when she said some of these s ome larger and hybrid firms and broker dealer firms with multiple lines of business can think of this as a very daunting task. One place to start is w ith t he f irm’s general ledger. Any source of income is obviously g oing t o be a potential conflict to be disclosed. Taking that approach and starting by listing all the ways that a firm generates its own income can serve to demystify the process and maybe give you a place to start. I mean certainly there are conflicts that don’t necessarily earn fees. There are practices that are just intrinsic conflicts that may not show up on the balance sheet, but that’s one place to look at if you’re having a hard time getting going.

Polly Cordle: 4:51

Okay. And what else should they be thinking about?

Nikki Brinkerho: 4:56

Lance, I think you’re right in the taking your balance sheet, but you also have to look at incentives and trips and you know, if you get a discount or soft dollars by the volume you do with somebody, those are all pieces. Don’t you think that have to go into the thought process?

Lance Whittemor: 5:19

Yeah, I would absolutely agree with that. I also think that other things that you can make revenue neutral but still have some sort of un-measurable influence on the way that you do your business, also count. For example, larger firms that may have an affiliated fund that they manage themselves and might want to use that in some of their client accounts – even if you’re rebating your management fees from a self-managed fund to a client, you still have some intrinsic incentives to use that fund just to make it bigger. So those are the kinds of things you want to look at.

Nikki Brinkerho: 6:15

I think the point is start with your GL and then identify what makes your GL bigger or potential to make your GL bigger. Does that sound right, Lance?

Lance Whittemor: 6:27

Absolutely, and I think other things like a self-managed fund or that sort of thing, which can give you a larger space in the marketplace of ideas, or something that can promote your name out there and make you a bigger player in the overall marketplace. Those are also things that have non-financial incentives that you want to consider when you think about disclosing conflicts of interest for the sake of form CRS and for investment advisors, also for your Form ADV Part 2.

Nikki Brinkerho: 7:03

I think Lance brings up a really good point, which is, if you don’t do a thorough gap analysis, and then identify all the things you have in that inventory, you can’t disclose them. So start with the first step and then move out and map out how you’ll be able to either mitigate, or disclose, or actually in some cases you could eliminate those conflicts.

Polly Cordle: 7:34

Yeah, and that first step being that inventory of conflicts you named.

Nikki Brinkerho: 7:40

Yeah. I think you have to have that, like Lance said , to start with.

Polly Cordle: 7:44

I thought Lance, your point about the mutual fund having an internal mutual fund and even if you rebate the fees, the growth of that mutual fund itself could be a conflict even though you’re not receiving direct revenue from it. That’s a very interesting point that I’m not sure many people would consider. So I think that’s also an interesting point. It seems like the disclosures could get huge, and I think, if I understand correctly, there is some limit to the length of the form. Is that correct?

Lance Whittemor: 8:19

Yes. For pure investment advisors I believe it’s two pages and there are even limits to the size of type you can use. They must be at least 8- or 10-point type I think. And you’re not allowed to make it any longer than that. There’s also the requirement that i t be plain English. Nikki can correct me, but I believe that for broker dealers and hybrids you have a little more room to work with. But you’re under a lot of pressure to make this very succinct and clear at the same time.

Polly Cordle: 8:53

So that in of itself could be a challenge, just getting it down to the two pages or three or four pages, if that’s what the requirement is on the BD (broker dealer) side of that. That seems like that could be a challenge for firms and it almost like lands on the advisory side. Would you describe it as kind of a summary of the ADV brochure at that point?

Lance Whittemor: 9:17

I wouldn’t exactly call it a summary, but it certainly should rhyme. They should be consistent. I think it’s also interesting to note too that in the SEC’s release about the standards of conduct for investment advisors, they don’t just limit disclosure to Form CRS. In fact, they’re pretty consistent in returning to the concept of informed consent as being a key component of fiduciary duty, and they talk about how informed consent can not just come in the A DV Part 2, a brochure. They do mention that they also specify that the language a nd the framework of the investment advisory agreement can also shape your relationship. When they talk about informed consent, t hey seem to really key in on the advisory agreement as one of the places that that can happen. It seems that they expect your advisory agreement and your ADV Part 2 t o act in conjunction to shape the relationship with a client.

Polly Cordle: 10:31

Interesting. And then, of course, that presents the risk later on for firms, that all of them get out of sync.

Lance Whittemor: 10:37

That is true. And that’s why it’s important to review both your ADV Part 2 and your advisory agreement fairly frequently and make sure that they agree with one another, and also that they’re consistent with your actual practices in your manual.

Polly Cordle: 11:04

All right . So that tells us a little bit about the advisory forms. Nikki, can you tell us a little bit about the length for the broker dealers or hybrid firms?

Nikki Brinkerho: 11:14

Sure. For the investment advisors , they’re limited in two pages, like Lance Said. And for dual registrants, they’ll be limited to four pages. So investment advisors, broker dealers, two pages for the summary and dual registrants are limited to four pages or the equivalent of four pages in an electronic format.

Polly Cordle: 11:37

So they get a little bit more space to deal with. I know in our third podcast on the top end we talked about the conflict inventory a great deal. If you have this huge conflict inventory, are you going to end up disclosing every one of those conflicts?

Nikki Brinkerho: 11:55

Well, I think you can eliminate some . Your first and easy pass is what can you eliminate? But then I think there’s things you can’t eliminate, and you have to find a way to disclose it. Lance, what do you think?

Lance Whittemor: 12:10

Well, I think that’s especially important on the investment advisor side. Going back to the standards of conduct for IAs (investment advisors) that were released back in June, those specify that the advisor may shape the relationship by agreement provided that there’s full and fair disclosure, and informed consent. So what that means is that if there are any conflicts that you can’t or won’t mitigate , it becomes increasingly important to ensure that those get specified in your agreement, in your ADV Form. For example, going back to what I was talking about earlier about an affiliate managed mutual fund. If you’re g oing t o use that inside your own c lient’s advisory accounts, obviously that presents a great conflict of interest. But if you can specify that inside the advisory agreement to such a degree that it is part of your relationship, if it shapes the relationship as they said, then you don’t need to mitigate that and you don’t need to eliminate it.

Nikki Brinkerho: 13:12

Polly, I think Lance is right. It’s all about informed investors being able to make a decision based on what the business looks like and who they’re doing business with. And that comes back to clear English and providing them the information, and they can decide to have a relationship with an advisor or a BD based on what their current structure looks like.

Polly Cordle: 13:39

Okay. It looks like FINRA came out with some additional guidance around Reg BI, and they’ve got a page dedicated to Reg BI and a pretty big checklist around the Form CRS. It looks like t hey’re coming up with some resources for firms now, and I know the SEC has published that piece. When did you say that came out? L ast year?

Lance Whittemor: 14:03

It was in June. It was part of the original Reg BI release. It was about a 45-page segment where they formalized the standards of conduct for investment advisors, and this is the piece that people described as a further clarification of the definition of fiduciary duty.

Polly Cordle: 14:28

So we’re getting some resources now from the regulators, which will help firms out. But I think it’s still a pretty daunting task, especially the conflict inventory and figuring out what you can mitigate, what you can eliminate. And of course, we at Oyster Consulting are always happy to help our clients. We have a number of ways that we can do that with all four of the obligations under Reg BI and we’re happy to do that. We hope that everyone has gotten something out of this podcast. Lance, any last comments before we end?

Lance Whittemor: 15:00

I think one last thought on this is that generally with big rule-making packages like this, you tend to see some frequently asked question releases as they get closer to implementation. Definitely be on the lookout for FAQs for further guidance. That may narrowed down the focus on some of these questions that still seem pretty vague. The other thing I’d say is that even though I make it sound like the investment advisor side is simpler than the broker dealer side , it’s certainly no less important. It may be less complicated to have a pure investment advisor business, but you definitely want to be as accurate as you can in what you say and do.

Polly Cordle: 15:42

Absolutely. And Nicky , any, any last thoughts from you before we finish up here?

Nikki Brinkerho: 15:46

I agree with Lance. There’ll be a lot of guidance that comes out but firms should start now. If they don’t understand what they have that they’re going to have to address or disclose, they can’t easily apply the additional guidance as it comes time to comply. And it’s going to become time to comply before we know it.

Polly Cordle: 16:12

Yes, absolutely it does . It seems far away, but it’s actually not that far away, and you’d rather be prepared and just tweak what you have, than get to that point and have waited for the guidance and not be prepared at all. So again, everybody, thanks for listening to the podcast . We hope you enjoyed it. We’ve got one more podcast coming out on Reg BI. There a re five in the series. If you want more information about Oyster Consulting, you can visit us at and learn about our services and our consultants. You can learn more about Lance and Nikki on our site, on the “About” page, and we hope you got something out of the podcast. We hope you’ll be listening for future podcasts a nd thanks everybody.

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