Here We Go Again! SEC Proposes Yet Another New Standard for Brokers

If you’ve been following the saga of the DOL’s fiduciary standard, you know that after a few years of hashing it out, it is still being debated. Now the SEC has picked up this onerous task. On April 18, the SEC voted to propose “Regulation Best Interest,” a “leisurely” 1,000-page read that spells out the rules and interpretations designed to improve the clarity of investor relationships with investment advisers and broker/dealers. The SEC has been under pressure to provide a fiduciary standard for brokers since the Department of Labor (DOL) proposed its Fiduciary Rule in 2016. Though Regulation Best Interest falls short of being the new fiduciary standard, instead it has been deemed an “alt-fiduciary” or “suitability plus” standard for brokers.

      Under Regulation Best Interest, a broker/dealer would be required to act in the “best interest” of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities.

Similar to the DOL rule, the SEC’s goal with Regulation Best Interest is to prohibit broker/dealers from putting their financial interests ahead of the interests of a retail customer when making recommendations. Currently, brokers are only held to a “suitability standard,” which means that they must only recommend investments to clients that are suitable, but not necessarily in their clients’ best interest. For example, brokers could recommend one suitable investment over another suitable investment if it paid a higher commission.

Additionally, the SEC proposes to help investors clarify their relationships with investment professionals through a new short-form disclosure document called a “client relationship summary” (Form CRS). The CRS would provide retail investors with simple, easy-to-understand information about the nature of their relationship with their investment professional and would also disclose fee structures and the firm’s business model. For registered investment advisers, this type of information is provided in Form ADV. For broker/dealers, disclosures of the material facts relating to the scope and terms of the relationship via a CRS would now be required under Regulation Best Interest.

Finally, the SEC proposed to prohibit broker/dealers and their reps from using the terms “adviser” or “advisor” as part of their name or title with retail investors unless they are registered as a registered investment adviser under the Investment Adviser’s Act of 1940 and therefore subject to its fiduciary duty.

The public comment period for the proposal will remain open for 90 days (through mid-July). The SEC will then take the comments under advisement when proposing revised or final rules. Initial industry commentary, as well as statements made by SEC commissioners, have been significant and will likely continue for many months to come.

What will be the final outcome of Regulation Best Interest? We won’t venture to guess, but stay tuned to this site for continual updates …