SEC Regulation Best Interest: Ready or Not, Here It Comes!


Just over one year has passed since the SEC proposed Regulation Best Interest (Reg BI) in April 2018. The SEC has stated that it hopes to have the regulation finalized by the end of September 2019. Although it’s anyone’s guess what the final regulation will look like, firms and reps would be well-served to start thinking ahead about what the rule will mean for their business. Given that, over the next few months we will be highlighting some of the aspects of Regulation Best Interest and the rules that accompany its proposal. In this post, we will give an overview of the SEC’s proposed “Standards of Conduct for Investment Professionals Rulemaking Package”, which includes Reg BI and several other proposed rules that are designed to provide clarity and protection to investors, broker-dealers, and reps.

Part of a three-prong, rulemaking “package,” Reg BI was drafted in an attempt to clarify the standard of care applicable to broker-dealers, registered representatives, and other associated persons. Additionally, the SEC hopes to resolve investor confusion surrounding broker-dealer and rep obligations towards their customers, and to fill the void that has been left by the dismantling of the Department of Labor’s ill-fated “fiduciary rule.”

While the DOL rule attempted to eliminate conflicts of interest that are present in the relationships between investors, broker-dealers, and reps, Regulation BI additionally seeks to require broker-dealer and their associated persons to act in their customers “best interest” when recommending securities transactions and investment strategies to their customers. Importantly, the DOL rule only applied to retirement accounts while Reg BI will apply to all retail customers.

The SEC’s Standards of Conduct for Investment Professionals Rulemaking Package consists of the following three proposed regulations:

  • Regulation Best Interest — imposes a duty on broker-dealers to act in the best interests of retail customers at the time recommendations are made, without putting the broker-dealer’s financial or other interest ahead of the customer. Firms and reps will be expected to comply with the three following guidelines:
    • Disclosure: Disclose to retail customers the primary facts about the relationship, including material conflicts of interest
    • Care: Exercise reasonable diligence, care, skill, and prudence to:
      • Understand the investment product
      • Have a reasonable basis to believe that the product is in the retail customer’s best interest
      • Have a reasonable basis to believe that a series of transactions is in the retail customer’s best interest
    • Conflicts of interest: Establish, maintain, and enforce policies and procedures reasonably designed to identify and disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives; other material conflicts of interest must be at least disclosed
  • Investment Adviser Interpretation — reaffirms and clarifies certain aspects of the fiduciary duty that an investment adviser owes to its clients. Broker-dealers and their reps would be prohibited 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.
  • Form CRS Relationship Summary — a standardized disclosure that will be required of advisers, broker-dealers, and reps that highlights key differences in the types of services offered, the legal standards of conduct that apply to each, the fees a customer might pay, and certain conflicts of interest that may exist.

What Is the Current Status?

Now that the comment period has ended, the SEC will debate the rule and consider any proposed modifications from the thousands of comment letters that it received. Per the SEC’s regulatory agenda, it will take final action by September 2019. While it is hard to predict what the final version will be, it seems clear that by year-end, broker-dealers and their representatives will soon see big changes in the ways in which they advise and interact with their customers.

Stay tuned for more updates …