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SEC Proposes Broker Best Interest Standard

The SEC has voted to propose a best interest standard for broker-dealers giving advice to retail customers.  The proposed “Regulation Best Interest” requires a broker to act in the best interest of the retail customer at the time the recommendation is made, notwithstanding its own financial interests.  The broker must disclose its conflicts of interest and have a reasonable basis to believe the recommendation and the series of transactions are in the client’s best interest.  The proposal also requires that brokers and advisers deliver a new disclosure form describing the relationship and conflicts of interest.  A retail customer is defined as a person who uses the recommendation primarily for personal, family, or household purposes.  The Rule defers to existing broker-dealer regulation to define the term “recommendation.” The SEC also proposed a companion rule seeking to clarify an investment adviser’s fiduciary duty including the obligation to provide advice in the best interest of the client, a duty of best execution, a commitment to provide ongoing monitoring, and a duty of loyalty.  The SEC has provided a 90-day comment period.

OUR TAKE: Don’t change anything yet based on this proposal.  Expect much debate during the comment period and thereafter, as even one of the SEC Commissioners dissented.  Our view is that brokers should be subject to the same fiduciary standard as investment advisers.  We don’t understand why the SEC would take this half-measure and enhance the broker standard without making it the same as the adviser standard.  This confusion is bad for customers and for brokers.