Fiduciary Duties and Regulation Best Interest

18 June 2019
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Key takeaways:
  • 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.