The Friday List: 10 Things You Need to Know About Regulation Best Interest
Today, we offer our “Friday List,” an occasional feature summarizing a topic significant to investment management professionals interested in regulatory issues. Our Friday Lists are an expanded “Our Take” on a particular subject, offering our unique (and sometimes controversial) perspective on an industry topic.
A few weeks ago, the SEC proposed Regulation Best Interest, which requires a broker to act in the best interest of each retail customer at the time the recommendation is made, notwithstanding the broker’s own financial interests. The SEC has been pondering a broker fiduciary rule for many years but lost the regulatory race to the Department of Labor, which promulgated its own rule. Now that the 5th Circuit has vacated the DoL Rule and the SEC has proposed its own rule, the current state of the law is unclear. Regardless, we have read the release and offer our list of the 10 things you need to know about proposed Regulation Best Interest.
10 Things You Need to Know About Regulation Best Interest
- Reasonable basis. A broker must have a reasonable basis that the recommendation is in the best interest of the client.
- Applies to retail customers. A retail customer is defined as a person who uses the recommendation primarily for personal, family, or household purposes.
- “Recommendation” remains the same. The proposal does not seek to change the definition of “recommendation,” preferring to defer to the current FINRA interpretations.
- No definition of “best interest”. In 400+ pages, the SEC never defines the term “best interest” when proposing Regulation Best Interest.
- More than suitability, less than fiduciary. Regulation Best Interest combines elements of the current suitability standard (e.g. suitable at time of transaction) with a few fiduciary-like elements (e.g. disclosure).
- Fails to harmonize RIA and BD standards. Advocates of a uniform fiduciary standard want a single standard so that consumers are not confused by the differing standards of care applicable to advisers vs. brokers. This proposal fails to ensure a “uniform” standard.
- Disclosure of conflicts of interest. The most significant new requirement is that brokers must disclose (or mitigate) conflicts of interest.
- Must consider series of transactions. Expanding traditional suitability, a broker must also consider the series of recommended transactions.
- Product neutrality not required. Brokers can make more money on recommended products, including proprietary products, so long as the conflict is properly disclosed and mitigated.
- Regulation Best Interest is not law. Comments are due on this controversial proposal by August 7, 2018. Thereafter, we expect much debate and re-drafting before any final rule is adopted.