SEC Adopts Rules and Interpretations To Enhance Protections and Preserve Choice for Retail Investors
On June 5, the Securities and Exchange Commission voted to adopt a package of rules and interpretations designed to enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers. Specifically, the SEC approved Regulation Best Interest.
Regulation Best Interest creates an enhanced standard of conduct applicable to broker-dealers at the time they recommend to a retail customer a securities transaction or investment strategy involving securities. When making a recommendation, a broker-dealer must act in the retail customer’s best interest and cannot place its own interests ahead of the customer’s interests.
The enhanced standard of conduct includes the following obligations:
Disclosure Obligation: Before or at the time of the recommendation, a broker-dealer must disclose, in writing, material facts about the scope and terms of its relationship with the customer.
Care Obligation: A broker-dealer must exercise reasonable diligence, care and skill when making a recommendation to a retail customer.
Conflict of Interest Obligation: Policies and procedures must be reasonably designed:
To mitigate conflicts of interests that create an incentive for an associated person of the broker-dealer to place its interests or the interest of the firm ahead of the retail customer’s interest;
When a broker-dealer places material limitations on recommendations that may be made to a retail customer (e.g., offering only proprietary or other limited range of products), to disclose the limitations and associated conflicts, and to prevent the limitations from causing the associated person or broker-dealer from placing the associated person’s or broker-dealer’s interests ahead of the customer’s interest; and
To identify and eliminate sales contests, sales quotas, bonuses and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time.
Regulation Best Interest will become effective 60 days after it is published in the Federal Register, and will include a transition period until June 30, 2020 to give firms sufficient time to come into compliance.
The SEC’s press release is available here.