Regulation Best Interest: What You Should Know

On June 5, 2019, the Securities and Exchange Commission adopted Regulation Best Interest (BI) which is intended to raise the standard of conduct for broker-dealers working with retail customers. The regulation had been under consideration since April 2018 and was passed by the Commission in a three-to-one vote. There are several major requirements of the rule:

1. Broker-dealers now must make all recommendations to the benefit of customers in a way that: (a) observes a standard of care, and (b) provides full and fair disclosure.
2. The financial interests of the broker-dealer may no longer take precedence over those of a customer.
3. Broker-dealers now must create and enforce policies and procedures to mitigate or eliminate material conflicts of interest in the form of a functional compliance program; this process will require ongoing action beyond disclosure in order to fully protect customers.

The Commission hopes to better regulate relationships among broker-dealers and their customers and to raise ethical expectations to meet those already applied to investment advisers. The objective is to further entitle retail customers to reliable recommendations which do not prioritize the interests of their financial professionals, and to clarify the role of the broker-dealer representative.

For example, brokerage firm sales professionals will no longer be able to use the title “advisor” or “adviser” unless the firm is dually registered as an investment adviser or they are supervised by an investment adviser.

Another example is allowing the financial planning service, provided by some registered sales professionals who are Certified Financial Planners (CFPs), to continue through a brokerage firm. Now, if a brokerage professional is a CFP, they are also subject to a code of ethics and standards of conduct that was recently revised to require they act as a fiduciary. These updates go into effect in October 2019.

Regulation BI was passed in a package which includes Form CRS, clarification of fiduciary duty guidelines, and a new interpretation of the “solely incidental” prong of the Advisers Act.