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June 1, 2018

SEC’s Regulation Best Interest Falls Short of Making Broker-Dealers Fiduciaries

Florham Park partners Sandy Grannum and Tracey Salmon-Smith, along with Chicago partner Jim Lundy, were quoted in an Employee Benefit News article entitled “SEC’s Regulation Best Interest Falls Short of Making Broker-Dealers Fiduciaries.”

The SEC recently proposed a series of standards for financial advisers regarding their service of retail customers. Since the release of the proposed standards, the benefits industry has been focused on figuring out what broker-dealers and registered investment advisers would need to do to comply with the Regulation Best Interest (Reg BI) component.

In an audiocast moderated by Fred Reish and to which Brad Campbell and Jamie Helman also contributed, Sandy provided background about the draft guidance, including the mandate from the 2010 Dodd-Frank Wall Street Reform Act, which asked the SEC to study the regulatory standard of care for broker-dealers and investment advisers for providing personalized investment advice and recommendations about securities.

Tracey commented on how the proposal compares to current regulations, and what it requires of financial professionals, noting that “[r]egulation best interest puts a best interest standard of conduct on broker-dealers but not a standard that rises to the level of fiduciary duty.” She also discussed what the goal of the regulation might be, and where clarity is needed.

Jim compared and contrasted Reg BI, the Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers (RIA Guidance), and FINRA’s suitability rule, and noted that the RIA Guidance described a “duty of care” that is strikingly similar to the suitability requirements for broker-dealers. Specifically, Jim stated that the SEC’s RIA Guidance includes a duty “to make reasonable inquiry into a client’s financial situation, investment experience and objectives and a duty to personalize advice that is suitable and in the best interest of their client. It brings together what we see in regulation best interest and the suitability type aspects of the rule.”

Read “SEC’s Regulation Best Interest Falls Short of Making Broker-Dealers Fiduciaries.”

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