The Securities and Exchange Commission (SEC) voted 3-1 to pass the Regulation Best Interest rules this morning, along with a few other proposals making up its “advice-standards package.”
Regulation Best Interest is a somewhat controversial set of new guidelines that will mandate brokers to work in the best interest of their clients when making investment recommendations. The existing standards only obligate broker-dealers to recommend “suitable” investments for their clients.
SEC Chairman Robert Clayton said the new rules will bar brokers from putting their financial interest ahead of the interests of the customer, as reported by ThinkAdvisor.
The rules will go into effect 60 days after they are published in the Federal Register. However, a transition period is in place through June 30, 2020, giving firms a year to comply.
Details of Regulation Best Interest
The nearly-800 page document requires broker-dealers to disclose material facts about the relationship between the broker and the customer as well as between the broker and their recommended investments. This includes the fees charged, the scope of services they are providing, potential conflicts, etc.
Also, the broker-dealer must establish written policies and procedures to eliminate or at least disclose conflicts of interests. This requires the broker-dealers to mitigate conflicts of interests that may lead brokers to place their financial interests before their customers, such as proprietary investment products, sales quotas and other compensation based on the sale of certain securities.
Criticism of Regulation Best Interest
SEC Commissioner Robert Jackson voted against the measure, claiming the rules fall short of ensuring brokers will work in the best interest of their clients because it fails to sufficiently define the higher standard. Jackson claimed the results showed that the SEC concluded that investment adviser are not true fiduciaries.
Barbara Roper, director of investor protection at the Consumer Federation of America, said the rules could do more harm than good by giving investors a false sense of greater protection, as reported by Financial Advisor IQ. She pointed out that FINRA already required brokers to make recommendations that are consistent with clients’ best interests and that the new rules don’t change anything.
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https://www.thinkadvisor.com/2019/06/05/sec-passes-regulation-best-interest-in-3-1-vote/
