SEC Announces New Best Interest Rule
Publicly available records published by the Securities and Exchange Commission on June 5, 2019, indicate that the SEC has adopted a new rule governing the nature of broker-dealers and investment advisers with their clients, including what the Commission refers to as “Regulation Best Interest” and the “Form CRS Relationship Summary.”
According to the SEC, these new rules are “designed to enhance and clarify the standards of conduct applicable to broker-dealers and investment advisers.” They are also intended to give retail investors greater tools to understand investments and services, and to compare investments and services, ultimately making more informed decisions about their investments and enjoying greater and more consistent protections.
Regulation Best Interest, or the “best interest rule,” required broker-dealers “to act in the best interest of a retail customer” when they recommend securities transactions or investment strategies involving retail customers. The SEC states that the best interest rule will strengthen standards of conduct for broker-dealers beyond standards that currently exist—specifically, obligations to recommend only suitable investments—and will also “make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer” in connection to the recommendation of investments, according to the SEC.
Meanwhile the Form CRS Relationship Summary mandates that investment advisers and broker-dealers give retail investors “simple, easy-to-understand information” about their relationship as investment adviser/broker-dealer and customer. The relationship allows for “layered disclosure,” according to the SEC, while also making room “for comparability among the two different types of firms in a way that is distinct from other required disclosures.” The form will link to an SEC webpage providing educational material for investors. The SEC states that it also released an interpretation reaffirming and clarifying its “views of the fiduciary duty” owed by advisers to clients, and “highlighting principles” related to the fiduciary duty that it hopes will provide clarity to clients about their advisers’ duties.
SEC Chairman Jay Clayton said in a statement: “The rules and interpretations we are adopting today address issues that the Commission has been actively considering for nearly two decades… Our staff, working collaboratively across all of our Divisions and many of our Offices, has leveraged its decades of experience and expertise in considering these issues. I believe that the exceptional work of the SEC staff, including their careful evaluation of the feedback we received, will benefit retail investors and our markets for years to come. This rulemaking package will bring the legal requirements and mandated disclosures for broker-dealers and investment advisers in line with reasonable investor expectations, while simultaneously preserving retail investors’ access to a range of products and services at a reasonable cost.”