April 19, 2018

Securities Alert: SEC Submits “Regulation Best Interest” for 90-Day Public Comment

On Wednesday, the SEC released its proposal for “Regulation Best Interest” which, if approved, will bring about changes to the standards governing financial services firms and professionals serving retail investors.  The SEC’s goal is to provide retail investment customers with greater clarity on the often blurred distinction between Registered Investment Advisors (“RIAs”) and broker-dealers.  In a 4 to 1 vote, the SEC Commissioners submitted Regulation Best Interest to a 90-day public comment period.  Comments may be submitted through the SEC website or sent by mail.

The release of Regulation Best Interest comes in the wake of last month’s Fifth Circuit Court of Appeals decision invalidating the Department of Labor’s Fiduciary Duty Rule for retirement account advisers.  Chamber of Commerce of the U.S. v. U.S. Dep’t of Labor, 2018 U.S. App. LEXIS 6472 (5th Cir. Mar. 15, 2018).  With this long-debated Department of Labor rule pushed to the sidelines, the release of Regulation Best Interest will be thoroughly examined by all stakeholders.

Currently, RIAs are considered fiduciaries under the Investment Advisors Act of 1940.  Brokers, on the other hand, must simply recommend suitable investments for their customers.  However, investor advocates have long charged that retail investors often cannot differentiate RIAs and brokers.  They argue that this lack of understanding amongst customers is ultimately detrimental to investors’ interests.

Regulation Best Interest would place new restrictions on how non-RIA broker-dealers communicate with clients and potential clients. Additionally, Regulation Best Interest also would place new obligations on RIAs to further crystalize the distinctions between these two groups.

Regulation Best Interest would:

  • Subject brokers to a “best interest” standard in which the broker-dealer “would have a duty to act in the best interest of the retail customer at the time the recommendation is made”;
  • Prohibit brokers who are not Registered Investment Advisors from using the word “advisor” or “adviser” in their title; and
  • Require brokers to identify, reasonably disclose, and mitigate conflicts of interests between themselves and the customer.

Additionally, Regulation Best Interest would require both brokers and RIAs to provide a written Client Relationship Summary document highlighting different legal obligations, fee arrangements, and types of services offered by brokers and RIAs.

Two of the SEC’s Commissioners did not greet Regulation Best Interest with open arms. Commissioner Kara M. Stein criticized Regulation Best Interest as maintaining the “status quo” and advocated that brokers should be held to a full fiduciary standard akin to that of RIAs.  Commissioner Robert J. Jackson expressed reservations on the real-world efficacy of the regulation and suggested that SEC staff needed to conduct further study on Regulation Best Interest’s effect on investor protection.  However, Commissioner Jackson ultimately voted in favor of opening Regulation Best Interest to public comment.

If the proposal results in a new standard, disputes between broker-dealers and their customers could be evaluated from different legal perspectives.  Savvy compliance and legal professionals will be wise to closely watch how these developments play out.

Please click here for the SEC Press Release on Regulation Best Interest.

Keesal, Young & Logan Securities Group

This information has been prepared by Keesal, Young & Logan for informational purposes only and is not legal advice. Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship between you and Keesal, Young & Logan. You should not act upon this information without seeking professional counsel.