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The SEC Adopts Regulation Best Interestby Andrew Whiteman

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The SEC Adopts Regulation Best Interest

On June 5, 2019, the United States Securities and Exchange Commission issued Release No. 34-86031, titled Regulation Best Interest: The Broker-Dealer Standard of Conduct. This much-anticipated rule takes effect on June 30, 2020.

The stated purpose of Regulation BI is to establish a standard of conduct for broker-dealers and their associated persons when they make recommendations to retail customers for any securities transaction or investment strategy involving securities. According to the SEC’s 771-page release, the Regulation BI enhances the broker-dealer standard of conduct by requiring broker-dealers “to act in the best interest of the retail customer at the time the recommendation is made,” to refrain from “placing the financial interest of the broker-dealer ahead of the interests of the retail customer,” to “address conflicts of interest by establishing, maintaining, and enforcing policies and procedures reasonably designed to identify and fully and fairly disclose material facts about conflicts of interest,” and, in certain instances, to mitigate or eliminate conflicts.

The actual regulation takes up less than six pages, while the remainder of the 771 pages consists of the SEC’s attempt to explain why this new regulation, rather than the much broader fiduciary rule that it replaces, is in the best interest of retail investors. In fact, Regulation BI is in many ways a step backward. The new was universally opposed by investor advocates, including the Public Investors Arbitration Bar Association, and falls far short of the protections investors deserve. The rule purports to require that brokers adhere to a “best interest” standard but does not actually require that they act in their customers’ best interests. The standard does not prevent brokers from placing their own interests first. It provides that brokers are not required to monitor customer accounts unless they agree “to provide the retail customer with specified account monitoring services.” Regulation BI permits broker-dealers to place their interests ahead of customers if they disclose the conflict.

The history of efforts to reform the standards applicable to broker-dealers has its origin in financial crisis that began in September 2018. In July 2010, President Obama signed the Dodd-Frank financial reform law, which gave the SEC the authority to develop a uniform fiduciary standard for retail investment advice that was no less stringent than the standard applicable to investment advisers under the Investment Advisers Act of 1940. The same year, the United States Department of Labor released a rule designed to limit conflicts of interest for financial advisers who worked with customer retirement accounts. In January 2011, the SEC staff issued a report that recommended the SEC propose a uniform fiduciary rule. On April 14, 2016, the Department of Labor issued its final version of the fiduciary rule. Full compliance with the rule was to occur by January 1, 2018. In August 2017, the Labor Department proposed that compliance with the fiduciary rule be delayed for 18 months, until July 1, 2019. By that time, President Trump had been elected. The new administration stated its opposition to imposing a fiduciary standard on broker-dealers, and Department of Labor’s rule was shelved. Regulation BI is its replacement.

The SEC commissioners adopted Regulation BI by a vote of three to one, with Commissioner Robert L. Jackson, Jr. casting the sole dissenting vote. Commissioner Jackson issued a statement in which he wrote “today’s rules retain a muddled standard that exposes millions of Americans to the costs of conflicted advice.” The Dodd-Frank law gave the SEC full authority to adopt a strong, pro-investor fiduciary standard that covered broker-dealers. Unfortunately, the SEC failed to do so.

© Andrew Whiteman 2019


The lawyers at Whiteman Law Firm have been handling securities matters for over 30 years. Click here for more information about our securities litigation and arbitration practice. Please contact us for more information.



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