For businesses to be conducted fairly, its best that companies try and avoid conflicting with each other. This often means keeping relationships between two companies as impartial and arm’s length as possible when facilitating transactions.
To combat conflicts of interests, the Security and Exchange Commission (SEC) recently passed the Best Interest Regulation under the securities act. (ACT) In effect, they established a standard to which broker dealers established their relationships. “As part of the rulemaking package, the SEC also adopted new rules and forms to require broker-dealers and investment advisers to provide a brief relationship summary, to retail investors. In addition, the SEC published interpretations concerning investment advisers’ standard of conduct under the Investment Advisers Act of 1940, and the "solely incidental" prong of the broker-dealer exclusion from the Advisers Act.”[1]
While it wasn’t due to this regulation, Merrill Lynch has taken steps to limit how many interactions are allowed in a broker dealer relationship. In a memo released on September 8th and signed by Keith Glenfield, head of investment solutions and Susan Axelrod, chief advisory officer, the memo in a boldfaced bullet point said the third parties “cannot pay for gifts, meals and entertainment for employees.” They also are “not permitted to fund entertainment that we provide to our clients…These changes further ensure business interactions with third parties continue to be in the best interest of our clients,” he (Keith) said.”[2] Previously they were allowed a certain amount to be spent on clients, such as tickets to sporting events and theater showings.
As this regulation shakes out, many companies should review their policies on entertaining to ensure they maintain an arm’s length transaction and avoid conflicts of interest. We expect other companies to adopt similar policies.
[1] https://www.finra.org/rules-guidance/key-topics/regulation-best-interest
[2] https://advisorhub.com/breaking-merrill-puts-kibosh-on-meals-and-gifts-from-wholesalers/
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