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SEC Adopts Best Interest Rule

By Joseph M. Mellano, Esq. of Shustak Reynolds & Partners, P.C. posted on Thursday, June 6, 2019.

 “Regulation Best Interest” Expands Broker-Dealers’ Duties to Address Conflicts of Interest When Making Recommendations to Retail Customers, but Stops Short of Obama Era Fiduciary Rule

On Wednesday, June 5, 2019, the Securities and Exchange Commission formally adopted Regulation Best Interest, establishing a new standard of conduct for broker-dealers in addressing conflicts of interest when making investment recommendations to retail customers.

Under Regulation Best Interest, broker-dealers will have a quasi-fiduciary obligation to “act in the best interest” of their retail customers “at the time [a securities transaction or investment strategy] recommendation is made, without placing the financial or other interest [of the broker-dealer] ahead of the interests of the retail customer[s].” This new standard of conduct, which many know as the “Best Interest Rule,” expands broker-dealers’ obligations to their retail customers beyond existing obligations to make “suitable” investment recommendations and, according to the SEC, “aligns the [broker-dealer] standard of conduct with retail customers’ reasonable expectations,” while increasing retail customers’ access to brokerage services and investment options.

The SEC’s adoption of Regulation Best Interest follows more than a year of deliberation and solicitation of public input and nearly a decade of public debate about whether a traditional fiduciary rule should apply to broker-dealers. In April 2016, the U.S. Department of Labor adopted a rule that effectively subjected most, if not all, broker-dealers to traditional fiduciary standards. However, in March 2018, the United States Court of Appeal for the Fifth Circuit vacated that rule on the grounds that it was at odds with federal statutory law, namely, the Internal Revenue Code and the Employee Retirement Income Security Act. In the wake of the Fifth Circuit’s decision, SEC Chairman Jay Clayton vowed to implement a new rule to govern broker-dealer conduct. Less than a month after the decision, the SEC proposed Regulation Best Interest.

Regulation Best Interest is not yet effective, nor does it have an effective date. However, the SEC has stated that all registered broker-dealers must begin complying with the new standard of conduct by June 30, 2020.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. We routinely represent broker-dealers and financial advisors in arbitrations, financial advisor transitions, broker protocol disputes, and related matters. Please contact us today for a confidential, complimentary consultation.

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