SEC Regulation Best Interest
In June of 2019 the SEC approved Regulation Best Interest, which requires broker-dealers to act in the best interest of their retail customers when making recommendations as to securities or investment strategies.
In adopting the regulation, the SEC stated that the regulation “enhances the broker-dealer standard of conduct beyond existing suitability obligations, and aligns the standard of conduct with retail customers’ reasonable expectations by requiring broker-dealers, among other things, to: Act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker-dealer ahead of the interests of the retail customer; and 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 instances where we have determined that disclosure is insufficient to reasonably address the conflict, to mitigate or, in certain instances, eliminate the conflict.”
The obligation to the customer, referenced as “The General Obligation,” is satisfied only if the broker-dealer complies with four specified component obligations. The obligations are:
(1) Providing certain prescribed disclosure before or at the time of the recommendation, about the recommendation and the relationship between the retail customer and the broker-dealer (“Disclosure Obligation”);
(2) exercising reasonable diligence, care, and skill in making the recommendation (“Care Obligation”);
(3) establishing, maintaining, and enforcing policies and procedures reasonably designed to address conflicts of interest (“Conflict of Interest Obligation”), and (
4) establishing, maintaining, and enforcing policies and procedures reasonably designed to achieve compliance with Regulation Best Interest (“Compliance Obligation”).
The Commission has stated that compliance with each of the component obligations of Regulation Best Interest will be principles-based. In other words, whether a broker-dealer has acted in the retail customer’s best interest will turn on an objective assessment of the facts and circumstances of whether the specific components of Regulation Best Interest are satisfied at the time that the recommendation is made.
The rule requires broker-dealers to adopt reasonably designed policies and procedures as we believe they are critical to identifying and addressing conflicts of interest and helping ensure compliance with the requirements to disclose conflicts of interest pursuant to the Disclosure Obligation.
Every firm must review their policies and procedures to insure they are in compliance with the requirements to disclose
The Regulation also requires firms and investment advisers to file Form CRS by June 30, 2020 and to deliver that form to its customers.
The SEC has provided instructions for what needs to be included in the Form CRS, as well a hypothetical examples. It is important to keep in mind that these forms are illustrative purposes only, and are not a form that should be used without modification for the specific needs of a firm.
Compliance with the new regulation is due by June 30, 2020. For assistance in drafting Form CRS or in updating your firm’s policies and procedures, call Sallah Astarita & Cox, LLC at 212-509-6544 or email mailto:firstname.lastname@example.org
Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.