October 21, 2019

October 21, 2019

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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.

©2019 Katten Muchin Rosenman LLP

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About this Author

Susan Light, Katten Law Firm, Finance Law Attorney, New York
Partner

Susan Light focuses her practice on financial services regulatory matters. She counsels broker-dealers, hedge funds, investment banks and financial services clients on enforcement issues involving the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), other self-regulatory organizations (SROs) and state and federal regulatory authorities. She has particular experience related to sales practice issues, financial and operational issues, anti-money laundering, crowdfunding, cybersecurity, and cryptocurrencies.

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212-940-8599
Michael T. Foley, Katten, Lawyer, Finance, FINRA, Chicago
Special Counsel

Michael Foley represents broker-dealers, investment advisers and other financial services industry participants with respect to a broad spectrum of legal and regulatory matters arising under the federal securities laws.

Michael has nearly 20 years of experience in private practice and in-house at both a large, full-service broker-dealer and at an online discount broker-dealer, advising broker-dealers and other financial institutions regarding compliance with the federal securities and commodities laws, and with the regulations of the US Securities and Exchange Commission, the US Commodity Futures Trading Commission and financial industry self-regulatory organizations. 

312-902-5452
Richard D. Marshall, Katten Muchin, SEC Representation Lawyer, Finance Attorney, New York,
Partner

Richard D. Marshall focuses his practice on the representation of financial institutions and employees subjected to investigations by the Securities and Exchange Commission, Department of Justice, Financial Industry Regulatory Authority and state securities regulators. Rick also counsels broker-dealers, investment companies and investment advisers on regulatory issues, particularly relating to SEC and FINRA regulations. He also frequently counsels clients on compliance and risk management issues and the handling of inspections.

Rick provides...

212.940.8765
Associate

Adam Haft is an associate in the Financial Services practice.

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