Independent Broker Dealer Consortium

Alert: SEC Proposes “Regulation Best Interest”

At an open meeting, the Securities Exchange Commission voted 4-1 to propose a set of rulemakings and interpretations designed to establish clear relationship standards between broker dealers and investment advisers and their retail clients. The SEC prescription comes on the heels of the 5th Circuit Court of Appeals decision to vacate the Labor Department’s stricter “fiduciary duty rule” promulgated under the Obama administration.

The SEC described the 400-plus page “Regulation Best Interest” proposal as requiring broker-dealers to act in the best interest of a customer “when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer.” For investment advisers, the SEC proposed certain interpretations explaining aspects of fiduciary duties that they owe to clients.

In a fact sheet distributed at the meeting, the SEC provided an outline of three compliance obligations that would be required under Regulation Best Interest. First, the SEC proposal would require that brokers disclose all “key facts” about potential conflicts, including compensation with respect to specific investment products. Second, broker-dealers would be required “to exercise reasonable diligence, care, skill, and prudence, to (i) understand the product; (ii) have a reasonable basis to believe that the product is in the retail customer’s best interest; and (iii) have a reasonable basis to believe that a series of transactions is in the retail customer’s best interest.” Finally, the SEC proposal would require broker dealers “to establish, maintain and enforce policies and procedures reasonably designed to identify and then at a minimum to disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives.”

In furtherance of these objectives, the SEC introduced a new “short-form” disclosure document (Form CRS) for investment advisers and broker dealers which would serve to summarize the customer or client relationship. The form, which will be no more than four pages, will highlight key differences in the types of services offered, as well as the legal standards of care for each.  In addition, the short form disclosure proposal would restrict certain broker-dealers servicing retail investors from using the terms “adviser” or “advisor” as part of their name or title.

There will be a 90-day public comment period on Regulation Best Interest after its publication in the Federal Register. Bates will undertake a comprehensive review and analysis of the proposal. For more on the implications of the proposed rule, please contact Bates Compliance Solutions Managing Director, Robert Lavigne at


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