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SEC Adopts Regulation Best Interest, Raising Broker Standard of Care

The SEC adopted Regulation Best Interest for broker-dealers that make recommendations to retail clients. Regulation Best Interest, intended to enhance a broker’s standard of care beyond suitability, requires a broker-dealer to act in the retail customer’s best interest and to refrain from transactions that favor the interests of the broker over the customer. The new rule requires disclosure as well as policies and procedures to ensure that brokers identify and mitigate conflicts of interest. The SEC also adopted new Form CRS that requires both advisers and brokers to provide retail customers with standardized information about their relationship, including services, fees, conflicts, standard of conduct, and disciplinary history. The SEC also issued an interpretation that addresses an adviser’s fiduciary responsibilities. Part of this regulatory package includes a refining of the “solely incidental” exception to adviser registration for brokers. Firms have until June 30, 2020 to comply with Regulation Best Interest, although the new interpretations apply immediately upon publication.

Let’s rename this “The Compliance Officer Full Employment Act.” Compli-pros at broker-dealers will have to rework all of their Written Supervisory Procedures, revise client agreements, create disclosures, and eliminate all prohibited conflicts. Compliance offices at investment advisers must address the new Form CRS requirement and implement new client onboarding procedures while figuring out the changes required by the investment adviser fiduciary interpretation. And, we only have 12 months to get this all done.

CCS’s Gillespie and Tyre Analyze Regulation Best Interest and Adviser Fiduciary Interpretation

The SEC recently proposed Regulation Best Interest, proposing a best interest conduct standard on retail brokers, and an expanded fiduciary interpretation applicable to investment advisers.  CCS’s Stacey Gillespie offers a summary of the expanded fiduciary interpretation, and Doug Tyre provides a description of the proposed Best Interest Standard.  Stacey analyzes how the SEC intends to interpret an adviser’s obligations of best execution, duty of care, duty of loyalty, and obligation to monitor.  Doug reviews how Regulation Best Interest would change a retail broker’s obligations to mitigate conflicts of interest, enhance disclosure, and exercise a heightened duty of care.  If you would like to discuss further, both Stacey and Doug are available to field your questions.

 

Regulation Best Interest 5-2-18

Fiduciary Rule Interpretation 5-2-18

 

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.