The Securities and Exchange Commission today finalized a rule implementing a “best interest” standard of conduct for broker-dealers when making recommendations on securities transactions or investment strategies to retail customers. The rule represents a different approach from the Labor Department’s fiduciary rule, which was vacated last year by a federal appeals court.
Under the final rule, a broker-dealer making a recommendation to a retail investor must act in the best interest of that customer at the time the recommendation is made. Broker-dealers must demonstrate their compliance with this duty through 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.
In addition, broker-dealers and registered investment advisers will be required to provide certain standardized information to retail investors through Form CRS, which was also finalized by the SEC today. The form includes information about duties, fees and conflicts of interest, as well as a link to the SEC’s investor website, investor.gov, which offers additional educational information.
As the American Bankers Association urged in a comment letter last year, in finalizing these rules, the SEC did not define the standard that applies to broker-dealers as a “fiduciary” standard, but rather as a “best interest” standard. In addition, in response to ABA advocacy, SEC preserved investor access to a variety of products and services, excluded fiduciary accounts of a bank or trust company from the definition of “retail investor” or “retail customer” and did not limit bank employees also working for broker dealers from having the term “adviser” in their titles.
