By Andrew K. Sledd, CPA, CFE, Business Assurance & Advisory Services Partner | Financial Services Industry Team
In the wake of the dismantling of the Department of Labor’s (DOL) Fiduciary Rule and the Trump Administration slow unwinding of provisions of the Dodd-Frank Act, the Securities and Exchange Commission (SEC) released the preliminary framework for their own Best Interest standard for broker dealers in securities. In April 2018, the SEC introduced the new standard of care framework, which will be better known as Reg BI. The new standard takes a principles-based approach aimed at bringing common sense provisions to how broker dealers service their clients’ needs.
For years now most broker dealers have operated under a standard known as suitability. The suitability provision at times often conflicted with acting in the best interest of the client because many investment options could be suitable for investors based on their net worth and risk profile but may not be in the client’s best interest as an investment option. Reg BI aims to build upon the suitability standards without creating a new or impractical regulatory framework.
The provisions of the proposal would require broker dealers to disclose key facts about the customer relationships, including material conflicts of interest; exercise reasonable diligence, care and skill to ensure recommendations of investment products are in the client’s best interest; and establish and enforce practices to identify, disclose and mitigate or eliminate conflicts of interest. 1
The key requirement of this proposal that stands out is the provision to mitigate or eliminate conflicts of interests. This differs significantly from investment advisor requirements to merely disclose conflicts of interest. The SEC has not fully described what would constitute material conflicts of interest but many believe they are referring to activities like sales contests based on certain product sales. The expectation is this provision will receive significant push back during the comment period, which still remains open to date.
Reg BI’s predecessor the DOL Fiduciary Rule, which aimed to make most all retirement accounts fee based and did not always make sense in every client circumstance. The introduction of this proposed regulation by the SEC appears to be step in the right direction bringing a more common sense approach to acting in a client’s best interest without placing undue restrictions and regulations on broker dealers.
Additional Resources for Broker Dealers:
- Potential Legislative Regulatory Changes: What You Should Know
- FINRA to Focus on High Risk Firms and Brokers for 2018
- Broker-Dealers May be on the Hook for Inadequate Audits
- PCAOB Finds Deficiencies in Broker-Dealer Audits
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.