An In-depth look at the SEC’s Regulation Best Interest


Blog Post by David Ackerman on 20 June 2019 in category Regulations

The Securities and Exchange Commission (SEC) has just passed Regulation BI, which is the most significant change to suitability regulation in the past 20 years. It now requires that broker-dealers act in the "best interest" of their "retail customers", fundamentally altering the investor protection process. The SEC concurrently adopted a rule requiring each broker-dealer and investment adviser to send its retail clients and file with the SEC a "Client Relationship Summary" providing information about that broker-dealer or adviser. I wrote a White Paper on this new regulation that can help you preparing for this change.

White Paper Synopsis

Amidst regional regulatory overhauls like MiFID II, massive political shifts like Brexit, and increasing sophistication and digitalization of clients, the wealth management industry is undergoing dramatic change and facing new challenges on all fronts. Regulation Best Interest ("Regulation BI" or "Reg BI"), is the next iteration of regulatory change designed to advance alongside this industry evolution.

As is the case with the fiduciary duty applicable to investment advisers under the Advisers Act, the term "best interest," is not expressly defined and instead is understood through interpretations, what "acting in the best interest" means. Whether a broker-dealer has acted in the retail customer’s best interest in compliance with Regulation Best Interest will turn on an objective assessment of the facts and circumstances of how the specific components of Regulation Best Interest—including its Disclosure, Care, Conflict of Interest, and Compliance Obligations—are satisfied at the time that the recommendation is made (and not in hindsight).

The best interest obligation is satisfied via a four-prong test. A broker-dealer must satisfy all four obligations : (1) the disclosure obligation; (2) the care obligation, (3) the conflict of interest obligation, and (4) a compliance obligation.

Regulation Best Interest is designed to improve investor protection by:

  • requiring broker-dealers to have a reasonable basis to believe that recommendations are in the retail customer’s best interest, which enhances existing suitability obligations by:
    - requiring compliance with the Care, Disclosure, Conflict of Interest, and Compliance Obligations;
    - expressly requiring consideration of cost in evaluating a recommendation as part of the Care Obligation;
    - requiring consideration of reasonably available alternatives when making a recommendation;
    - applying Regulation Best Interest to recommendations of account types and rollovers and to any recommendations resulting from agreed-upon account monitoring services (including implicit hold recommendations); and
    - applying the Care Obligation to a series of recommended transactions (currently referred to as "quantitative suitability") irrespective of whether a broker-dealer exercises actual or de facto control over a customer’s account;

  • requiring broker-dealers to establish, maintain, and enforce written policies and procedures reasonably designed to mitigate (and in some cases, eliminate ) certain identified conflicts of interest that create incentives to make recommendations that are not in the retail customer’s best interest;

  • requiring disclosure under the Disclosure Obligation of the material facts relating to the scope of terms of a broker-dealer’s relationship with the retail customer and the conflicts of interest associated with a broker-dealer’s recommendation, which will foster retail customers’ understanding of their relationship with the broker-dealer and help them to evaluate the recommendations received; and

  • requiring broker-dealers to establish, maintain and enforce written policies and procedures reasonably designed to achieve compliance with regulation as a whole, which will further promote broker-dealer compliance with Regulation Best Interest.

Download the full 30-pages White Paper "Highlights of SEC’s Regulation Best Interest" from the Resource Center and get full access to all our informative white papers, analyst reports, eBooks, brochures, and on-demand webinars.