Regulation Best Interest
September 9th | 2019
What is it?
On June 5, 2019, the SEC adopted a package of rules and interpretations regarding the standard of conduct applicable to broker-dealers providing retail investment advice and the fiduciary duty applicable to SEC-registered investment advisers. These topics were covered in four separate SEC releases, which cover: (1) Regulation Best Interest; (2) Form CRS Relationship Summary; (3) an interpretation of the fiduciary duty applicable to SEC-registered investment advisers; and (4) an interpretation of what “solely incidental” means for broker-dealers.
This note focuses on Regulation Best Interest (“Reg. BI”), which raises the broker-dealer standard of conduct beyond existing suitability obligations by requiring broker-dealers and investment advisers dually-registered as broker-dealers, when acting as broker-dealers, to act in the best interests of their retail customers when making recommendations to retail customers. Regardless of whether a retail investor chooses a broker-dealer, an investment adviser, or a combination thereof, retail investors are entitled to recommendations from broker-dealers and advice from investment advisers that are in their best interests, where the investment adviser or broker-dealer does not place their own interests ahead of the retail investor’s. The rule is written broadly to apply to all types of broker-dealer recommendations including stock picks, whether to rollover an account, and what type of account to open.
What do I have to do?
Reg. BI codifies four obligations that broker-dealers must fulfill when making recommendations to retail customers to meet their duty to act in such customers’ best interests:
Disclosure: provide certain prescribed disclosures before or at the time of the recommendation about the recommendation and the relationship between the retail customer and the broker-dealer;
Care: exercise reasonable diligence, care, and skill in making the recommendation;
Conflict of Interest: establish, maintain, and enforce policies and procedures reasonably designed to address conflicts of interest; and
Compliance: establish, maintain, and enforce policies and procedures reasonably designed to achieve compliance with Reg. BI.
Reg. BI adds a new requirement to Rule 17a-3, which requires among other things, a record of all information collected from and provided to the retail customer pursuant to the rule. Notably, Reg. BI also amends Rule 17a-4(e)(5) to require broker-dealers to separately retain records that specifically demonstrate compliance with Reg. BI.
When is the deadline to comply?
Reg. BI is effective on September 10, 2019, and broker dealers have until June 30, 2020 to comply with the new rule. The SEC expects that firms use that time to create the necessary disclosures and to develop, update, or establish policies and procedures and systems to achieve compliance with Reg. BI.
The same deadline will apply to Form CRS Relationship Summary, which is another new disclosure and filing requirement that applies to both broker-dealers and investment advisers (not just dually registered firms acting as broker-dealers), which Titan will cover in our next post.
Can Titan Regulatory and Advisory help me?
Of course! For more information about Reg. BI, Form CRS, and what you need to do to, reach out to us at Titan and learn why your business should #TradeUpToTitan.