On June 5, 2019, the Securities and Exchange Commission adopted a series of rulemakings and interpretations, including new Regulation Best Interest, intended to increase transparency in the financial services market while preserving investors’ access to the market. These initiatives include Regulation Best Interest (Reg B-I); the Form CRS Relationship Summary, which is a new form that brokers are required to provide to all investors; and a pair of interpretations under the Investment Advisers Act of 1940. At its heart, Reg B-I enhances the standard of conduct broker-dealers must meet when serving retail customers, but the package of initiatives also addresses investment advisers’ obligations. While here we provide a few practice pointers for any practitioner responsible for providing legal or compliance advice to broker-dealers or investment advisers, we have provided a more detailed analysis of the new standards resulting from these efforts at the ABA Securities Litigation Journal.
- Broker-dealers should begin to assess how to implement policies and procedures satisfying Regulation Best Interest. Registered broker-dealers do not need to comply with Regulation Best Interest until June 30, 2020, but they should begin to assess what steps must be taken to ensure compliance. Compliance with the regulation may require a comprehensive assessment of what policies and procedures need to be put in place, creating and implementing those policies and procedures, training on those policies and procedures, and a method for ensuring ongoing adherence.
- Broker-dealers may need to wait to find out what “best interest” means in practice. Regulation Best Interest—which leaves the term “best interest” undefined—is not a model of clarity. In practice, FINRA—not the SEC—is likely to be the front-line enforcer of Regulation Best Interest through its extensive examination and disciplinary programs. The impact of Regulation Best Interest will likely be felt first through the scope of information FINRA seeks in examinations, and future public statements and enforcement actions may better indicate how FINRA interprets the new rule. While this standard evolves, broker-dealers ought to monitor FINRA and SEC advisories, guidance, and filed and settled actions to conform their conduct as closely to the standard as possible over time.
- It is not clear whether Regulation Best Interest preempts state laws. Unlike the SEC, many states have extended fiduciary obligations to broker-dealers, particularly in recent years as they awaited SEC action in this area. The SEC did not take a position regarding preemption. For now, broker-dealers in those states should continue to observe the higher state standard. Ultimately, however, whether Regulation Best Interest displaces those state laws will likely be determined through litigation.
- The new rules and interpretations likely will have little impact on investment advisers’ current practices. With the exception that investment advisers must provide customers with a relationship summary, the SEC’s new rules and interpretations purportedly do not enhance the obligations already imposed on investment advisers. On one hand, the SEC maintains that its interpretation only reaffirms (and in some cases clarifies) existing obligations. On the other hand, in his dissent from the approval, Commissioner Jackson contended that the interpretation actually lowers the standard for investment advisers, stating that “the Commission today concludes that investment advisers are not true fiduciaries.” He added that “[t]housands of advisers who have taken pride in putting clients first for decades will be surprised to learn that, all along, the SEC has had lower expectations for their work.” But whether that is the case may very well have to be decided by the courts in the future. In the meantime, it might be safest for investment advisers to stick with the standards they currently observe.
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