ADISA responded to NASAA’s request for comment on the Proposed Amendments to the NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents.

ADISA’s membership includes retail broker-dealers as well as managing broker-dealers involved in the marketing of alternative investments, including non-listed REITs, BDCs, interval funds, closed end funds, and private placements, among others. As such, this ADISA membership constituency is particularly impacted by the Proposal.

The Proposal Improperly Conflates Form CRS with Reg BI Violations

The Proposal states that the amendments “are intended to update the model rule in light of the SEC’s 2019 adoption of Regulation Best Interest and other developments in the securities industry” by adding a new Part 1.d to NASAA’s Dishonest or Unethical Business Practices of Broker-Dealers and Agents Model Rule applicable to broker-dealers. Specifically, the Proposal, if adopted, would prohibit “failing to comply with the obligations set forth in Regulation Best Interest, as set forth in rule 17 C.F.R. 240.151-1, including, but not limited to, 17 C.F.R. 240.17a-14. In doing so, the Proposal elevates a violation of Form CRS to a violation of Reg BI. But equating these violations—which impose distinct requirements on broker-dealers—would cause confusion and, more importantly, would prove inconsistent with SEC guidance. ADISA believes the Model Rule should take a slightly different approach and avoid any such potential confusion.

Because the stated reason for the Proposal is to “update the model rule in light of the SEC’s 2019 adoption of Regulation Best Interest,” ADISA recommends removing the words “including, but not limited to 17 C.F.R. 240-17a-14” from Part 1.d of the Proposal. Doing so would, in our view, help ensure that the distinction between Reg BI and Form CRS is maintained in the resultant Model Rule.

NASAA Should Move Form CRS Violations to an Independent Section

In the event that NASAA believes it necessary to expressly incorporate a violation of Form CRS into the Model Rule, we recommend creating a new sup-part (Part 1.e or even Part 1.z) to separately include violations of 17 C.F.R. 240.17a-14.

The letter was drafted by ADISA volunteer Kevin Bendix, DFPG Investments, and was signed by ADISA President Jade Miller, Bourne Financial Group.

Read the letter in its entirety here.