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On April 18, 2018, the SEC proposed a new rule under the Securities
Exchange Act of 1934 entitled “Regulation Best Interest” to establish a
standard of conduct for broker-dealers and natural persons who are associated
persons of a broker-dealer to act in the best interest of a retail customer
when making a recommendation of any securities transaction or investment
strategy involving securities to the retail customer.
The SEC’s own Investor Advisory Committee recently voted
16-3 to recommend changes to proposed Regulation Best Interest. Notably, the
recommendation suggests adding language making it clear that Regulation Best
Interest is a fiduciary standard, yet the recommendation also suggests
flexibility in how firms with different practice structures would have to
comply with the regulation by recognizing that there are a range of
broker-dealer business models and a range of investment advisor business
models. In other words, the Committee recommends the standard be flexible
enough to be applied to the variety of ways in which advice and recommendations
are offered to retail investors. Thus, compliance with the recommended standard
would be based on whether the broker or advisor had a reasonable basis for the
recommendation at the time it was made.
The SEC will consider this recommendation made by the
Committee as it works to finalize the rule. FINRA’s CEO, Robert Cook, stated
that if Regulation Best Interest is passed, FINRA will consider doing away with
its suitability rule and begin checking if broker-dealers are complying with
Regulation Best Interest as part of its role in examining broker-dealers for
compliance with the SEC’s rules and enforcing those rules in a manner
consistent with the SEC’s authoritative interpretations.