The time has come.  Regulation Best Interest is now upon us.  The forms are filed, the websites and the policies are updated.  Now we must live the rule.  We have been talking about it for a few years, but let’s make sure we are all up to speed on the requirements.  

A Customer Relationship Summary (Form CRS) must be delivered either electronically or hard copy to each customer before a recommendation can be made.  The CRS is required by the Securities and Exchange Commission (SEC) to be given to every client or prospective client before a recommendation can be made.  The summary describes the services offered, the fee structures, and the legal obligations as well as conversation starters prescribed by the SEC. We are required to deliver this to all existing clients within 30 days of filing the form with the SEC and with every new account.  It will be your responsibility to deliver it as you pen new accounts. We will be sending it to all existing clients. The Leaders Group Form CRS is available here.  

All recommendations must be made in the retail client’s best interest.  This is doing the right thing for the customer.  Make sure you don’t have any conflicts of interest with the client and disclose any that may be seen as potential conflicts with the client. Recommendations cannot be based on how you are compensated.   

Adviser/Advisor cannot be used in your title, business name or materials unless you are an investment adviser representative.  This is to make it clearer to clients the difference between fee-based and commission-based financial professionals. You may need to get new business cards, letterhead and change your email signature.  (Don’t forget to send the proofs to us for approval before getting them printed.) 

Many policies have had to change to ensure compliance with Reg BI. We have made changes to the Code of Conduct – adding “I shall put my clients’ interests before my own when making recommendations”, and “I remember that doing the right thing is always the right thing”. We have added a section on Standard of Conduct (page 11) and added that in addition to being suitable, recommendations must be in the best interest of clients.  

New Account Investment Profile and Worksheets changes: We have added additional disclosure on product and fee information and added fields for the date of CRS delivery and how it was delivered,  as well as share class if a mutual fund is sold and product name. Worksheets now include if you will be monitoring the account.  If you will be, make sure you document the monitoring and review as it occurs.  

We will no longer open clearing accounts to only hold mutual funds. The cost of a clearing account is normally higher than holding funds direct at the fund, so unless there are mitigating circumstances, we will not allow new accounts at our clearing firm for people investing solely in mutual funds. 

Mutual fund and annuity share classes must be analyzed to make sure they are in the best interest of the client.  You must make sure the share class fits the client time horizon and objectives and is the best recommendation for them. 

You need to make sure you are offering the correct account type for your client. If you are registered as both a broker-dealer representative and an investment adviser representative, you must make sure you are recommending an advisory or brokerage account that is in the best interest of the client.  You need to deliver the CRS for both The Leaders Group and TLG Advisors if you are discussing both types of accounts. 

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Jane Riley, Chief Compliance Officer

As soon as we think we understand where we are and where we might be going, something happens to wake us up and show us we are not at all where we thought, and there is no indication of what way we are headed.  Unemployment for May surprised everyone, followed by a record retail sales number, and then the COVID numbers started to increase again just as it seems that things are beginning to reopen.  The market gyrations since the beginning of the coronavirus pandemic have been unprecedented in history, but the world around us has also given us a glimpse of things we have never seen.  The roller coaster of the market has reacted to all these external forces in addition to the turmoil of the protests and aftermath of the ensuing riots and looting.  Throughout history, any of these events would have had impact on the economy and the markets, but the perfect storm of all of them occurring across such a short time period has caused more volatility and unpredictable direction for stocks or bonds.  We would normally expect that the pandemic would continue to lead to a “U”-shaped curve for the equity markets or more likely towards the “swoosh” that was being talked about last month.  However, the economic numbers are leading us to expect more of a “V” curve in the economy as spending, unemployment and confidence numbers have surprised us.  The bullish trend has continued to drive the direction ever since the major selloff at the beginning of the lockdown.  

Many businesses have reopened, at least partially, and according to a survey by Lending Tree, nearly 70% of their small business customers are concerned they either won’t have enough sales to make reopening worthwhile or they will have to shut down if the infections begin to spike again.  While all of this is happening, there is still the issue of 20 million people unemployed that were working before the pandemic and the elimination of the “extra” unemployment income from the CARES Act in mid-July.  Also, the Federal Reserve has been adding dollars to the economy since 2008, and I fear that the impact will begin to dwindle soon.  Last, but by no means least, the S&P capitalization is now more than 110% of estimated GDP for 2020.  Normally 115-125% is seen at the top of a bull market. These are the things that keep me concerned about continuation of the trend.  However, the market does not follow any rules, and there is an unprecedented amount of pent up cash that still does not have many other investment alternatives.  I believe that the volatility we have seen this year will continue through the elections and, depending on the outcome, could continue throughout 2021.  

I do expect to see the trend of the markets to continue in an upward direction throughout the rest of the 3^rd quarter with significant swings occurring as a result of news about the virus and economic developments.  The appetite for stocks will continue to drive the market until there is enough negative news that the institutions, and not the algorithm driven computer traders, change their long-term bullish expectations.  

Do not believe the media hype as it comes along.  They are intended to be for a news cycle and while the stories can be frightening (or joyful), most of the news really has become headline focused with much less news and much more noise.  Have a fantastic Fourth of July holiday and remember:  There is still not a better place to live and work than the United States of America.

Stay Safe and God Bless!

Dave