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December 3rd, 2018
securities
SEC’S OWN INVESTOR ADVISORY COMMITTEE RECOMMENDS SEC CLARIFY PROPOSED REGULATION BEST INTEREST

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.

We recommend our broker-dealer clients keep up to date on any activity and changes regarding the SEC’s proposed Regulation Best Interest, as well as any activity and changes by FINRA in response, in order to plan accordingly for compliance purposes.
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