Adjunct professor and partner at Mound Cotton Wollan & Greengrass, Barry Temkin, co-authored an article with Melissa Tarentino, vice president of legal affairs at Ladenburg Thalmann Financial Services, that was published in The New York Law Journal. It unpacks the compliance obligations of a package of rules adopted by the SEC in June designed to increase the transparency of investor, investment advisor, and broker-dealer relationships.
On June 5, 2019, the Securities and Exchange Commission (SEC) voted to adopt a package of rules and interpretations “designed to enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers.” U.S. Securities and Exchange Commission, SEC Adopts Rules and Interpretations to Enhance Protections in Their Relationships With Financial Professionals (June 5, 2019). Regulation Best Interest (Reg BI) went into effect on Sept. 10, 2019, with a compliance date of June 30, 2020.
The SEC was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to study the feasibility of adopting a fiduciary standard for registered securities representatives. Currently, registered investment advisers are held to a fiduciary standard by the SEC, whereas registered representatives are governed by a suitability standard implemented by the Financial Industry Regulatory Authority (FINRA), which issues their licenses. Investor advocates complained that the dual standards would be confusing to customers, especially since many advisers are dually registered as both registered representatives and IARs.
The regulation contains a General Obligation, which requires that broker-dealers “when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer … act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or natural person who is an associated person of a broker or dealer making the recommendation ahead of the interest of the retail customer.” Regulation Best Interest: The Broker-Dealer Standard of Conduct, 84 Fed. Reg. 33,318, 33,491, 17 C.F.R. §240.15l-1) (hereinafter Reg BI). In order to satisfy the General Obligation, a broker dealer must satisfy the following four component obligations: (1) the Disclosure Obligation, (2) the Care Obligation, (3) the Conflict of Interest Obligation, and (4) the Compliance Obligation. Thus, “whether a broker-dealer has acted in the retail customer’s best interest will turn on an objective assessment of the facts and circumstances of whether the specific components of Regulation Best Interest are satisfied at the time that the recommendation is made.” Reg BI at n.16. Note that the regulation applies, by its terms, to “the time the recommendation is made,” and does not impose an ongoing obligation to monitor the customer’s accounts.