By Dave Thayer
Doing business has become riskier for broker-dealers giving investment advice. On June 5, 2019, the Securities and Exchange Commission (SEC) adopted “Regulation Best Interest” which in a nutshell says that broker-dealers cannot put their own pocketbooks ahead of their clients’ “best interest.”
For years, broker-dealers were viewed as purveyors of investment products and services with minimal fiduciary duties to their clients other than the requirement to recommend investments that are “suitable” to their clients. The problem has been that broker-dealers may recommend suitable investments that bring in the highest commission, notwithstanding that the recommended investment may have higher investment fees or other negative attributes when compared to similar investments. With the adoption of Regulation Best Interests, broker-dealers now have a duty to act in the best interest of the retail customer by offering meaningful disclosure of all material conflicts, require them to exercise reasonable care in recommending securities or investment strategies, and require them to identify and address conflicts of interest.
In light of the SEC’s proposal of Regulation Best Interest, the SEC also issued an interpretation to reaffirm and in some cases clarify the fiduciary duty that an investment adviser owes to its clients under the anti-fraud provisions of Section 206 of the Investment Advisers Act of 1940.
The interpretation provides a discussion on the implied duty of care (i.e., to provide advice that is in the client’s best interest, to seek best execution and to provide advice and monitoring over the course of the relationship) and the duty of loyalty (to put client’s interest first, not to favor one client over another, to make full and fair disclosure and avoid conflicts of interest).
Regulation Best Interest will become effective 60 days after it is published in the Federal Register, and will include a transition period until June 30, 2020 to give firms sufficient time to be in compliance. Interpretations under the Advisers Act will become effective upon publication in the Federal Register.
David A. Thayer, Esq., is a corporate and transaction attorney, and former CPA, that focuses on being a deal maker, not a deal breaker, as he helps clients achieve their business dreams. He can be reached at firstname.lastname@example.org.
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