Regulation Best Interest: Understanding the SEC’s Final Rules Governing Advice

The U.S. Securities and Exchange Commission (SEC) voted 3-1 on June 5, 2019, to finalize Regulation Best Interest (Reg BI) under the Exchange Act. This new, nationwide best interest standard imposes a materially heightened standard of conduct for broker-dealers when serving retail clients.

When Reg BI was approved, SIFMA President and CEO, Kenneth E. Bentsen, Jr., stated that although the costs for the industry to implement would be significant, “we believe it to be worthwhile to uniformly enhance investor protection to the level investors should and do expect, while preserving investor choice and access to investment advice.”

By June 30, 2020, registered broker-dealers must comply with Reg BI, and must act in the best interest of their retail customers, without placing their financial or other interest ahead of the customer’s interest. Additionally, broker-dealers and investment advisers registered with the SEC must prepare, file, and deliver to retail investors, a new customer relationship summary.

On July 10, 2019, in Washington DC, SIFMA hosted an in-depth, half-day seminar that featured keynote speakers SEC Commissioner Hester Peirce and lead authors of Regulation Best Interest, SEC Directors Dalia Blass and Brett Redfearn. The seminar explored the Commission’s final rules and also discussed what’s next, including potential DOL action and state-level fiduciary proposals. Commissioner Peirce said she is hoping “the states will allow us the time to really show that this standard works.”

Key regulators and practitioners gathered to discuss the newly finalized Regulation Best Interest, Form CRS, and related interpretive guidance. The conversation focused on the new standard of conduct for broker-dealers, and a new uniform disclosure for both broker-dealers and investment advisers.

SEC Commissioner Hester Peirce told seminar attendees that SEC Chairman Jay Clayton has been talking with the U.S. Department of Labor (DOL) “very frequently throughout this whole process” of finalizing Regulation Best Interest and she is optimistic that the DOL will embrace the SEC standard.

Given the aggressive timeline to implement Reg BI – which has a compliance deadline of June 30, 2020 –Commissioner Peirce “expects that implementation efforts are already up and running. ” She encourages financial professionals to “talk to us early and often,” adding that implementation challenges will vary from firm to firm.

Director of the SEC Division of Trading and Markets, Brett Redfearn discussed the primary features of the final rule and told attendees that the rule is designed to apply at the time a securities recommendation is made.

Dalia Blass, Director of the SEC Division of Investment Management said that Regulation Best Interest preserves investor choice and the final rule gives investors the tools to make the financial decisions that are right for them. She also stated that investment advisers are different from broker-dealers and under the final rule, the SEC will continue to regulate brokers and advisers separately.

To learn more, watch The View From Washington: A Conversation with SEC Commissioner Peirce and visit SIFMA’s Best Interest Standard Resource Center.

Kevin Carroll is Managing Director and Associate General Counsel for SIFMA.