Regulation Best Interest Update

Comments are due to the Securities and Exchange Commission (SEC) by August 18, 2018 on the proposed Regulation Best Interest.  This is a significant proposal as it is the SEC’s attempt to  address and replace the DOL’s Fiduciary Rule.  As such, it is important for the financial industry to review and comment on the proposal.

Under proposed 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 to a retail customer.  Regulation Best Interest is designed to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations.

In addition to the proposed enhancements to the standard of conduct for broker-dealers in Regulation Best Interest, the SEC proposed an interpretation to reaffirm and, in some cases, clarify the SEC’s views of the fiduciary duty that investment advisers owe to their clients.  By highlighting principles relevant to the fiduciary duty, the SEC believes that investment advisers and their clients would have greater clarity about advisers’ legal obligations.

Additionally, the SEC proposes to help address investor confusion about the nature of their relationships with investment professionals through a new short-form disclosure document — a customer or client relationship summary (Form CRS).  Form CRS would provide retail investors with simple, easy-to-understand information about the nature of their relationship with their investment professional, and would supplement other more detailed disclosures.  For advisers, additional information can be found in Form ADV, for broker-dealers, disclosures of the material facts relating to the scope and terms of the relationship would be required under Regulation Best Interest.

The SEC also  proposes to restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor” as part of their name or title with retail investors.  Investment advisers and broker-dealers would also need to disclose their registration status with the SEC in certain retail investor communications.

From the SEC’s perspective, the proposed rules and interpretations would enhance investor protection by applying consistent principles to investment advisers and broker-dealers: provide clear disclosures, exercise due care, and address conflicts of interest.  From an industry perspective, now is the time to make comments so as the final rule is thoughtful, and addresses both investor concerns, and the concerns of the industry.