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Understanding the SEC’s expanded new rules for broker conduct

The death of the U.S. Dept. of Labor’s Fiduciary Rule last year left a hole in efforts to expand “rules of the road” for fiduciary advice across the field. In response, the Securities and Exchange Commission approved a four-part package of regulations in early June with the purpose to provide investors with clear information about their relationship with their investment professional.

The “Broker-Dealer Conduct Standard Regulation Best Interest and Form CRS” are similar to the SEC fiduciary standards for Registered Investment Advisors (RIAs), which requires advisers to put their client’s interests above their own. Broker-dealers have not been bound by the same standards. While the new regulations do raise the standard for broker-dealers, they are still short of the legal standard of care required by RIAs.

What’s meant by ‘best interest’

The regulation falls under Securities and Exchange Act of 1934 and establishes a new conduct standard for broker-dealers “beyond existing suitability obligations”.[1]  There are four components to Regulation Best Interest: Disclosure, Care, Conflict of Interest and Compliance Obligations.

The Care Obligation requires that broker-dealers act in the best interest of a retail customer when making recommendations of any securities transaction or investment strategy.  This includes rollover recommendations, which if made, must take into account fees and expenses, level of services available, investment options, penalty free withdrawals, RMDs, protection from creditors and legal judgements. The SEC states that the basis for recommending a rollover cannot be because the IRA has more investment options.[2]

Broker-dealers must either disclose, or eliminate, conflicts of interest.  Any material facts about the relationship and recommendation of products and services provided must also be disclosed.  Written policies and procedures must be in place, and broker-dealers must “achieve compliance with Regulation Best Interest as a whole.”[3]

Form CRS

While Regulation BI is aimed primarily at broker-dealers, Form CRS will impact broker-dealers as well as RIAs and dual registrants offering advisory services. They must provide clients with Form CRS at the beginning of the relationship, and file it with the SEC.  This form is in addition to Form ADV which is mandatory for advisers required to register with the SEC.

Form CRS is a relationship summary that should be easy to comprehend. It includes information about services, fees and cost, conflicts of interest, legal standard of conduct, and whether the firm and its financial professionals have disciplinary history.[4] The form will also include a reference to Investor.gov/CRS which provides educational information to help educate investors.

Form CRS must be delivered to existing clients within 30 days after filing with the CRD or IARD. RIAs filing their initial application for registration with the SEC after May 1, 2020, must submit Form CRS along with other Form ADV disclosures.

Compliance Deadline

Regulation Best Interest and Form CRS become effective 60 days after publication in the Federal Register. The compliance deadline is June 30, 2020.

The regulations, however, have already received backlash.  At the end of June, the House voted on an amendment introduced by U.S. Rep Maxine Waters to block the enforcement of Regulation Best Interest, claiming they weren’t tough enough. The provision prevents the SEC from proceeding to implement, administer, enforce or publicize the regulations by prohibiting its spending authority.[5] 

Waters, a California Democrat, stated, “The SEC’s final rule ignores the explicit will of Congress and fails to require all financial professionals to abide by a strong, uniform fiduciary standard of care when providing investors with investment advice.”[6]

Though her amendment is not likely to pass in the Senate, this may be the first of many attacks on the new regulations. Time will tell if they will be implemented.

Resources:

https://www.sec.gov/rules/final/2019/34-86032.pdf

https://www.sec.gov/rules/final/2019/34-86031.pdf

https://www.cnbc.com/2019/06/26/house-passes-bill-blocking-enforcement-of-sec-investor-protection-rule.html


[1] Regulation Best Interest: The Broker-Dealer Standard of Conduct. U.S. Securities and Exchange Commission. June 5, 2019, https://www.sec.gov/rules/final/2019/34-86031.pdf

[2] Regulation Best Interest: The Broker-Dealer Standard of Conduct. U.S. Securities and Exchange Commission. June 5, 2019, https://www.sec.gov/rules/final/2019/34-86031.pdf

[3] SEC Adoption Rules and Interpretations to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Financial Professionals. U.S. Securities and Exchange Commission. June, 5 2019, https://www.sec.gov/news/press-release/2019-89

[4] SEC Adoption Rules and Interpretations to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Financial Professionals. U.S. Securities and Exchange Commission. June 5, 2019, https://www.sec.gov/news/press-release/2019-89

[5] House Passes Waters’ Amendments to Support Small Businesses and Protect Investors. U.S. House Committee on Financial Services. June 28, 2019, https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=404005

[6] Waters to SEC: Put the Interests of Savers and Retirees First. U.S. House Committee on Financial Services. June 5, 2019, https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=403858

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