06.05.2019
By Rob Daly

SEC Approves Reg BI

The U.S. Securities and Exchange Commission has approved Regulation Best Interest and three additional rule changes put forward by the Division of Trading and Markets and the Division of Investment Management in a three-to-one vote along party lines.

“The guidance suggests that a careful reading of decades-old cases reveals that we were wrong last year to say, ‘This is the law,” said SEC Commissioner Robert Jackson, the sole dissenting vote. “l disagree. The law does not compel the conclusion that my colleagues reach today. Instead, the Commission is wrapping a policy choice in legalese.”

Although the final version of Reg BI does not contain a uniform rule set that would apply equally to broker-dealers and investment advisors, it will protect the interests of retail investors, stressed SEC Chairman Jay Clayton in his opening remarks.

“Our staff’s decades of experience and expertise, the information and feedback from market participants for the rulemaking process, and nearly 14 months of deliberation following our proposals have all led to the conclusion that a more tailored approach would better serve our retail investors and markets and this is the right approach,” he said.

The new regulation’s standard of conduct for broker-dealers incorporates fiduciary principles found in the Investment Advisers Act and includes specific requirements that address certain aspects of the broker-dealer’s relationship with its retail customers, the SEC staff reported.

Reg BI goes beyond simple disclosure and includes care, conflicts-of-interests, and compliance obligations, noted Emily Westerberg Russell, a senior special counsel at the SEC.

Under the care mandate, broker-dealers must exercise reasonable diligence, care, and skill when making recommendations as well as understand the potential risk, rewards, and costs of the recommendation in the light of the investor’s profile.

Broker-dealers also will need to establish, maintain, and enforce written policies and procedures to identify and, at a minimum, disclose or eliminate all conflicts of interest associated with the recommendation, according to Westerberg Russell.

“The policies and procedures must mitigate conflicts-of-interest that create an incentive for an associated person or the firm that puts the firm ahead of the retail customer’s interest,” she added.

Finally, broker-dealers need to establish, maintain, and enforce written policies and procedures reasonably designed to achieve regulatory compliance, including their disclosure and care obligations.

“Failure to comply with any of the components will violate Regulation Best Interest,” said Westerberg Russell. “The standard of conduct established cannot be satisfied through disclosure alone.”

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