SEC's new rule for broker dealers: Regulation Best Interest

On June 5, 2019, the Securities and Exchange Commission (SEC) adopted Regulation Best Interest (Reg BI) Rule 15I-1 under the Securities Exchange Act of 1934. Reg BI establishes a best interest standard of conduct for broker dealers when a recommendation is made to a retail customer of any securities transaction or investment strategy involving securities. The regulation became effective on Sept. 10, 2019, and requires compliance by June 30, 2020.

This regulation seeks to enhance the required standard of conduct to ensure broker dealers are acting in the best interest of the customer, ahead of their own interest. This overarching principle is referred to as the “general obligation.” In addition, there are provisions that require compliance with specific obligations, which set forth what it means to “act in the best interest.” The general obligation is satisfied only if the specific component obligations are satisfied.

The specific obligations are as follows:

1. Disclosure Obligation
   Broker dealers must provide written disclosure of all material facts about the scope and terms of its relationship with the customer. This includes disclosing that the firm is acting in a broker dealer capacity, as well as providing the associated fees, the scope of services and conflicts of interest. Such disclosures should be made at the time or prior to the recommendation and should be updated to reflect any material changes or inaccuracies as soon as practicable, but not later than 30 days after the change occurs.
2. Care Obligation
   Broker dealers must exercise reasonable diligence, care and skill. The broker dealer must believe that the recommendation is in the customer’s best interest having known all costs, risks and rewards. A broker dealer should consider reasonable alternatives, if any, offered by the broker dealer in determining whether there is a reasonable basis for making such a recommendation. The Care Obligation is evaluated at the time of the recommendation, and not in hindsight.
3. Conflict of Interest Obligation
   Broker dealers must establish, maintain and enforce policies and procedures, which identify conflicts of interest in making recommendations to customers and require, at a minimum, disclosure or mitigation of such conflicts. Broker dealers must eliminate certain conflicts, such as sales contests, quotas and bonuses that are based on the sale of specific securities in a certain period.