Standard of care expected to protect investors while preserving access to adviceAccess the SEC Regulation Best Interest here
WASHINGTON, D.C. – With the arrival of the June 30 implementation date for the Securities and Exchange Commission’s (SEC) new Regulation Best Interest (Reg BI), the Financial Services Institute (FSI) applauds the Commission for establishing a workable, universal standard of care that applies to all financial advisors, regardless of their business model.
“We commend the Securities and Exchange Commission on its development and rollout of Regulation Best Interest, which we have supported since it was proposed,” said FSI President & CEO, Dale Brown. “This critical new rule represents a tremendous step forward in protecting Main Street American investors, increasing transparency and reducing confusion as to the obligations of financial professionals.
At the same time, establishing the policies, procedures and systems necessary to comply with such a sweeping change has been a significant challenge, and we commend our members and our industry for their diligent efforts to ensure a smooth implementation process for the new rule. Reg BI provides a workable and business model-neutral framework for serving clients’ best interests while also preserving access to high-quality, professional financial guidance.”
No ‘Sprawling Patchwork’ Of Requirements
Brown continued, “Looking ahead, we encourage states and other regulatory agencies that are considering their own standard-of-care proposals for investment advice to wait and evaluate whether additional regulation is necessary following Reg BI’s implementation. The alternative – creating a sprawling patchwork of inconsistent and potentially conflicting requirements – would undermine the progress we have made today.”
The SEC’s development of Reg BI came on the heels of the Department of Labor’s (DOL) fiduciary rule being struck down by the Fifth Circuit Court of Appeals in March 2018 as part of a legal challenge brought by a coalition of organizations, including FSI. The challenge highlighted the unworkable nature of the DOL rule, which was overly vague, unduly burdensome and would have restricted investor choice and access to financial services and products.
Leading up to today’s deadline, FSI has assisted members in the implementation process to help ensure a smooth, effective transition to the new standard. FSI worked with the SEC to address industry questions and concerns regarding the new requirements, and it provided workshops where members could collaborate as they worked diligently toward implementation.
Excerpts From The SEC Regulation Best Interest
What is a recommendation?
The determination of whether a broker-dealer has made a recommendation that triggers application of Regulation Best Interest turns on the facts and circumstances of a particular situation, and therefore, whether a recommendation has been made is not susceptible to a bright line definition. Factors considered in determining whether a recommendation has taken place include whether the communication “reasonably could be viewed as a ‘call to action’” and “reasonably would influence an investor to trade a particular security or group of securities.” The more individually tailored the communication to a specific customer or targeted group of customers about a security or group of securities, the greater the likelihood that the communication may be viewed as a “recommendation.”
Dually registered financial professionals: If you are a financial professional who is dually registered (i.e., an associated person of a broker-dealer and a supervised person of an investment adviser (regardless of whether you work for a dual-registrant, affiliated firm, or unaffiliated firm)) making an account recommendation to a retail customer, whether Regulation Best Interest or the Advisers Act applies will depend on the capacity in which you are acting when making the recommendation. If you are acting as a broker-dealer or associated person thereof, you must comply with Regulation Best Interest and will need to take into consideration all types of accounts that you offer (i.e., both brokerage and advisory accounts) when making the recommendation of an account that is in the retail customer’s best interest.
What does the Care Obligation require?
Under the Care Obligation, you must exercise reasonable diligence, care, and skill when making a recommendation to a retail customer to:
- understand potential risks, rewards, and costs associated with recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers;
- have a reasonable basis to believe the recommendation is in the best interest of a particular retail customer based on that retail customer’s investment profile and the potential risks, rewards, and costs associated with the recommendation and does not place the interest of the broker-dealer ahead of the interest of the retail customer; and
- have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer’s best interest when viewed in isolation, is not excessive and is in the retail customer’s best interest when taken together in light of the retail customer’s investment profile.
Whether you have complied with the Care Obligation will be evaluated as of the time of the recommendation (and not in hindsight).
What does the Conflict of Interest Obligation require?
- The Conflict of Interest Obligation (and the Compliance Obligation discussed below), applies solely to the broker- dealer entity, and not to the associated persons of a broker-dealer. For purposes of discussing the Conflict of Interest Obligation, the term “broker-dealer” or “you” refers only to the broker-dealer entity, and not to such individuals.
- Under the Conflict of Interest Obligation, a broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to address conflicts of interest associated with its recommendations to retail customers.
FSI looks forward to continuing its dialogue and collaboration with federal and state officials on regulatory solutions that safeguard the interests of retail investors while protecting their access to unbiased, professional financial advice.
About the Financial Services Institute (FSI)
The Financial Services Institute (FSI) is the only organization advocating solely on behalf of independent financial advisors and independent financial services firms. Since 2004, through advocacy, education and public awareness, FSI has successfully promoted a more responsible regulatory environment for nearly 100 independent financial services firm members and their 160,000+ affiliated financial advisors – which comprise over 60% of all producing registered representatives. We effect change through involvement in FINRA governance as well as constructive engagement in the regulatory and legislative processes, working to create a healthier regulatory environment for our members so they can provide affordable, objective advice to hard-working Main Street Americans. For more information, please visit financialservices.org.