SEC Best Interest Rule

When you speak with your broker or investment advisor, you expect that the advice and recommendations they give you will be right for your investment objective and your financial situation. Unfortunately, that's not always the case. If you regularly read our Security Arbitration blog posts, you already know that not all investment advisors consider their clients best interests in those recommendations.

The SEC recently implemented what's called the Best Interest Rule. This rule is also known as Regulation Best Interest, or by the shorter nickname Reg BI. Under this rule, brokers are required to always consider the client's best interest when making recommendations or conducting transactions on their behalf, and brokers should not put their own self interests ahead of the customer’s best interest. Brokers must also identify possible conflicts of interest and any financial incentives that the broker-dealer may have for the sale of those securities and other products.

Previously, brokers were only held to the standard of “suitability.” That is, when a broker advised their clients, they only were required to recommend investments that were suitable, but not necessarily in a client's best interest. Reg BI requires that broker consider the client's best interests before making a recommendation.

Reg BI is a new standard of conduct under the Securities Exchange Act of 1934, and applies to broker-dealers, brokers, investment advisors, and any “associated persons” related to the brokers or investment advisors. The SEC implemented Reg BI on June 30, 2020, for both broker-dealers and investment advisors.

All broker-dealers are required to comply with Reg BI. This includes the establishment, maintenance and enforcement of policies and procedures that work to keep them reasonably in compliance with the requirements.

Broker-dealers are encouraged to suggest that brokers consider only their clients’ profitability by eliminating incentives for specific investment vehicles. This can include bonuses, quotas, competitions, and other types of non-monetary compensation for the sale of a particular product or security, or for a specific time frame.

Prior to making any recommendations, a broker must make a complete and fair disclosure of any possible conflicts of interest and any related material facts that may be associated with that recommendation. The disclosure has four elements:

1. Care - a broker-dealer must exercise care, skill and diligence when making a recommendation, and understand all costs, risks, and rewards involved.
2. Compliance - all broker-dealers must establish, maintain, and enforce policies and procedures that are reasonably intended to attain compliance with Regulation Best Interest. 
3. Conflict of Interest - a broker-dealer must also establish, maintain, and enforce policies and procedures to identify and at least divulge or remove any conflicts of interest. This can include removing incentives for brokers to put the firm’s interests and their own above their customers, such as quotas and contests.
4. Disclosure - broker-dealers are required to disclose any material facts that involve the products and services offered and their relationship with each.

The goal of Reg BI is to help investors make sound and informed decisions without the potential of a “hard sell” toward certain investments.

Silver Law Group represents investors in securities and investment fraud cases. Our lawyers are admitted to practice in New York and Florida and represent investors nationwide to help recover investment losses due to stockbroker misconduct. If you have any questions about how your account has been handled, call to speak with an experienced securities attorney. Most cases are handled on a contingent fee basis, meaning that you won’t owe us until we recover your money for you. Contact us today at (800) 975-4345 and let us know how we can help.