Understanding Regulation Best Interest
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The document discusses the SEC's Regulation Best Interest, which sets a standard for broker-dealers to act in the best interest of retail customers, including obligations related to disclosure, care, and conflicts of interest. It also outlines the differences between this regulation and the Department of Labor's fiduciary rule, emphasizing enforcement and compliance requirements. Key topics include the importance of client assessments, record-keeping, and the standards for evaluating the best interest of customers.
Understanding Regulation Best Interest
- 1. www.nicsa.org | #WebinarWednesday Understanding Regulation Best Interest August 13, 2019
- 2. Presenters Chad Fleck Vice President Compliance Fidelity Investments www.nicsa.org | #WebinarWednesday Jay Herold Vice President and Senior Counsel MFS Moderator Jeff Cook Director of Regulatory Compliance DST Systems Thomas Grygiel Principal Consultant ACA Compliance Group
- 3. www.nicsa.org | #WebinarWednesday Release No. 34-86031 Regulation Best Interest: The Broker-Dealer Standard of Conduct • Application – “Retail” customers – Recommendations – securities transaction, investment strategy, account/roll • Disclosure Obligation – Capacity – Fees & Costs – Type & scope of services – Limitations on recommendations • Care Obligation – Reasonable-basis (what I call “Know your security”) – Best interest of the particular customer based on the customer’s profile – Series of recommendations • Conflict of Interest Obligation – Identify & eliminate – Identify, mitigate & disclose • Compliance Obligation – Policies & procedures – Supervisory program • Records – All information collected and provided to a retail customer – Identity of representative responsible for the account – 6 years Similar to/based on the core elements of FINRA’s Suitability Rule
- 4. www.nicsa.org | #WebinarWednesday Release No. IA-5248 Commission Interpretation Regarding Standard of Conduct for Investment Advisers • Duty of Care – Best Interest • Reasonable inquiry into client’s objectives (Similar to “Know your customer”) • Assess and align to customer’s profile (Similar to “Customer-specific suitability”) • Reasonable investigation into securities (Similar to “Reasonable-basis” suitability) – Best Execution • Maximize value for the client • Periodically evaluate – Monitoring Over the Course of the Relationship • Duty of Loyalty – Eliminate or mitigate & disclose – Quality/specificity of disclosures Also similar to the core elements of FINRA’s Suitability Rule
- 5. www.nicsa.org | #WebinarWednesday Release No. IA-5249 Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion from the Definition of Investment Adviser • Advice is Outside of the Broker-Dealer Exemption If: – A broker-dealer’s primary business is giving advice as to the value and characteristics of securities or the advisability of transacting in securities; or – The advisory services are not offered in connection with or are not reasonably related to the broker-dealer’s business of effecting securities transactions • Facts & Circumstances Assessments • Examples: – Discretion – Account monitoring
- 6. www.nicsa.org | #WebinarWednesday Release 34-86032 Form CRS Customer Relationship Summary & Release IA-5247 Amendments to Form ADV • Prepare – 2/4 page limit – Plain English, fair disclosure – Follow SEC’s instructions • Required content for each category • Conversation starters – Machine readable • File – Web CRD/IARD • Deliver – Post online – Existing customers – New customers – Electronically / Paper (first in any set of materials) • Maintain & Amend Assess business • Print vendors • Advisor policies & procedures, training, delivery processes, and supervision
- 7. www.nicsa.org | #WebinarWednesday Reg BI vs. DOL Fiduciary Rule SEC Regulation Best Interest • Account type agnostic • Imposes a Best Interest Standard • SEC will enforce the Rule (FINRA most likely also) • Enforcement will include restitution and penalties • Suitability standard is component of Best Interest • Conflicts need to be disclosed, mitigated or eliminated • Best Interest Standard not defined DOL Fiduciary Rule • Focused on IRAs and ERISA Plans • Imposes Best Interest Standard via Impartial Conduct Standards • Regulatory and class action lawsuits • Allows for a waiver of punitive damages • Impartial Conduct Standards include: Best Interest, Reasonable Compensation and no misleading statements • Conflicts may be permitted with Best Interest Contract or Prohibited Transaction Exemption • Impartial Conduct Standards
- 8. www.nicsa.org | #WebinarWednesday Areas to Consider • Define Best Interest • Identify Conflicts of Interest – Disclose – Mitigate – Eliminate • How to Document Best Interest – Updates to SEA Rules 17a-3 and 17a-4 • Compensation • Training • State Best Interest/Fiduciary Rules • Certified Financial Planner –Fiduciary Standard
- 9. www.nicsa.org | #WebinarWednesdayswww.nicsa.org | #WebinarWednesdays Q&A