SEC Proposes Best Interest Regulations for Broker-Dealers, Investment Advisers

In a long-awaited move, the Securities and Exchange Commission today proposed two new rules and an interpretation to improve investors’ understanding of their relationships with investment advisers and broker-dealers. The new proposals would represent a different approach from the Labor Department’s fiduciary rule, which was recently vacated in its entirety by a federal appeals court.

Under the SEC’s proposal, a broker-dealer making a recommendation to a retail investor would have a duty to act in the best interest of that customer at the time the recommendation is made. Broker-dealers can demonstrate their compliance with this duty with three specific obligations: an obligation to disclose key facts about the relationship, including material conflicts of interest; a care obligation that requires broker-dealers to exercise reasonable diligence, care, skill and prudence in understanding products and the customer’s best interest; and a conflict-of-interest obligation that requires policies to identify, disclose and mitigate or eliminate conflicts.

The SEC approved a proposal to require investment advisers and broker-dealers to provide retail investors with a “relationship summary,” a standardized disclosure with a maximum of four pages that would highlight differences in services offered, legal standards that apply to each, possible fees and conflicts of interest. The proposal would also require clarity from investment advisers and broker-dealers and their employees in communications with current or prospective investors.

The commission also proposed an interpretation reaffirming that investment advisers have a fiduciary duty toward their clients. ABA staff are closely reviewing the lengthy proposals and will provide comments to the SEC. Comments are due within 90 days. For more information, contact ABA’s Tim Keehan.