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Fiduciary Duties and Regulation Best Interest
18 June 2019
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On June 5, 2019, the SEC adopted a package of rulemakings and interpretations designed to enhance the quality and transparency of the duties owned by broker-dealers to retail investors and clarify the duties of registered investment advisers. In particular, new Regulation Best Interest is intended to substantially heighten the duties that a broker-dealer owes when it makes a recommendation to a retail customer. The SEC states that the Rule is intended to bring broker-dealer duties in line with reasonable investor expectation while preserving retail access to “full-service” brokerage. However, the burdens imposed on broker-dealers for providing incidental advice are substantial.
Regulation Best Interest draws on key elements of classic fiduciary duties (e.g., care and loyalty) to impose four component sets of requirements on broker-dealers under the rubric “best interest.” At a high level, these requirements can be described as imposing: (i) very extensive conflict and relationship disclosure requirements; (ii) duties to make careful and non-self-interested recommendations based on FINRA suitability requirements, (iii) duties to eliminate certain compensation arrangements and mitigate conflicts of interest relating to employment incentives more broadly; and (iv) related compliance policies and procedures requirements.
While the final rule retains much of the original proposal, the adopting release contains extensive new interpretive guidance. The compliance timeline is aggressive, and broker-dealers will likely need to undertake systematic reviews of practices around communications with retail customers and compensation of sales personnel in relatively short order.
Kenneth J. Berman
Robert B. Kaplan
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