Regulation Best

Information on Regulation Best Interest 


Regulation Best Interest

In June 2019, the SEC adopted a package of new regulations and interpretations

Regulation Best Interest: The Broker-Dealer Standard of Conduct

A more detailed summary can be found here.

  • Broker-dealers must act in the best interest of the retail customer at the time of the recommendation, meaning that they cannot place their financial or other interests ahead of the retail customers’ interests. Broker-dealers must also address conflicts of interest by establishing, policies and procedures reasonably designed to identify and either disclose, mitigate, or eliminate conflicts of interest.

  • The new regulation will enhance investor protection by:
    • Enhancing the obligations that apply when a broker-dealer makes a recommendation to a retail customer;
    • And reducing the potential harm to retail customers from conflicts of interest that may affect the recommendation.

  • In order advance the goal of placing the customer’s interests ahead of the broker-dealer, the broker-dealer must satisfy four specific component obligations:
    • Disclosure Obligation
    • Care Obligation
    • Conflict of Interest Obligation
    • Compliance Obligation

Form CRS: Client Relationship Summary

A more detailed summary of Form CRS can be found here.

Both investment advisers and broker-dealers will be required to provide a relationship summary to retail investors, which is intended to inform investors about:

  • The type of client and customer relationships and services the firm offers;
  • The fees, costs, conflicts of interest, and required standard of conduct associated with these relationships and services;
  • Whether the firm and its financial professionals currently have reportable legal or disciplinary history;
  • And how to obtain additional information about the firm.

Interpretation of an Investment Adviser's Standard of Conduct

A more detailed summary of the interpretation can be found here.

  • An investment adviser is a fiduciary and therefore owes duties of care and loyalty to clients.
  • A duty of care means:
    • The duty to provide advice that is in the best interest of the client;
    • The duty to seek best execution of a client’s transactions where the adviser has the responsibility to select broker-dealers to execute client trades;
    • And the duty to provide advice and monitoring over the course of the relationship.
  • A duty of loyalty means that an investment adviser must:
    • Either eliminate conflicts of interest;
    • Or make a full and fair disclosure of all material facts and conflicts of interest while obtaining the client’s informed consent to continue providing advising services.

Interpretation of the "Soley Incidental" Prong of the Investment Advisers Act of 1940

A more detailed summary of the interpretation can be found here.

  • A broker-dealer that provides limited advisory services is excluded from coverage under the Advisers Act if such advisory services are “solely incidental” to the conduct of the broker-dealer’s business.
  • A broker-dealer’s advice is consistent with the “solely incidental” prong “if the advice is provided in connection with and is reasonably related to the broker-dealer’s primary business of effecting securities transactions.” This is true regardless of the importance of the investment advice to a particular client.