SEC Approves Regulation Best Interest


ACA Compliance Group

Publish Date


Compliance Alert

  • Compliance

On June 5, 2019, the U.S. Securities and Exchange Commission (“SEC”) passed Regulation Best Interest (“Reg BI”) by a vote of 3–1. The new regulation becomes effective 60 days after it is posted in the federal register and broker-dealers will have until June 30, 2020, to comply.

Broker-dealers will be required to act in the best interest of their retail customers when recommending any securities transaction or investment strategy. As part of Reg BI, BDs and registered investment advisers (“RIAs”) will be required to provide retail investors with a Form CRS Relationship Summary which discloses the nature of the relationship between the entities and their customers.

In addition to passing Reg BI and approving Form CRS, the SEC also passed the following interpretations:

  • A clarification of the interpretation of fiduciary duty under the Investment Advisers Act
  • An interpretation of the exclusion under the Investment Advisers Act in which advice provided by registered representatives of broker-dealers is “solely incidental” when it relates to the business of conducting securities transactions

What You Should Know

To comply with Reg BI, broker-dealersmust do the following when interacting with retail customers:

  • Disclosure Obligation: Broker-dealers are required to disclose the following:
    • Material facts about the relationship
      • Scope of services offered
      • Limitations of offerings
      • Conflicts
      • Whether the broker-dealer provides ongoing monitoring
    • Material facts about recommendations
      • Fees
      • Risks
  • Care Obligation: Broker-dealers are required to exercise diligence, care, and skill when making recommendations to customers. Recommendations must be in the best interest of the customer, and potential costs, risks, and rewards need to be considered along with the customer’s particular situation
  • Conflict of Interest Obligation: Broker-dealers are required to develop written policies and procedures to disclose, mitigate, or eliminate conflicts of interest. These policies and procedures must include the following:
    • Firms must mitigate conflicts of interest that would provide an incentive to a broker-dealer to put its interests ahead of a customer’s interests
    • Firms with limited offerings or only proprietary offerings must prevent these limitations from putting the interests of the broker-dealer and registered representative ahead of their customers’ interests
    • Firms must eliminate sales contests, quotas, bonuses and noncash compensation related to the sales of specific products within a specified timeframe
  • Compliance Obligation: Broker-dealers must establish, maintain, and enforce policies and procedures for compliance with Reg BI

The Compliance Obligation was not contained in the original proposal and is a new requirement under the approved Reg BI. The final version of Reg BI also adds recommendations of account types to its scope of coverage, as well as recommendations to roll over retirement plan assets to an IRA and recommendations to take a distribution from a retirement plan. Additionally, the final version enhances the Care Obligation from the original proposal to state that BDs must take costs into consideration when recommending a product or strategy.

Issues remain despite the passage of Reg BI. Critics who feel the regulation does not go far enough to protect investors are threatening lawsuits. In addition, several states, including Nevada and New Jersey, have proposed regulations which would require broker-dealers and their registered representatives to act as fiduciaries. The Department of Labor stated it would issue its own fiduciary regulation in December, which initial reports suggest will be similar to Reg BI. Regardless of what becomes of these efforts, firms only have a little over a year to comply with Reg BI. It is important that firms begin developing the processes and procedures necessary to address Reg BI.

For More Information

For more information on Reg BI, please contact your ACA consultant or Dee Stafford.