By Andrew K. Sledd, CPA, CFE, Business Assurance & Advisory Services Partner | Financial Services Industry Team Leader
In June 2019, the Securities and Exchange Commission (SEC) released Regulation Best Interest: The Broker- Dealer Standard of Conduct, or as it is better known Reg BI.
Reg BI Overview
Reg BI obligates broker-dealers to abide by four specific standard of care in placing customers into investments. Those standards require the following: broker-dealers must disclose material facts about the relationship and recommendations, including specific disclosures about the capacity in which the broker is acting, fees, the type and scope of services provided, conflicts, limitations on services and products, and whether they provide monitoring services.
Brokers must also exercise reasonable diligence, care, and skill when recommending an investment to a retail customer; understand potential risks, rewards, and costs associated when making the recommendations in the customer’s best interest; consider the costs of the recommendation; and have policies and procedures reasonably designed to identify and at a minimum disclose or eliminate conflicts of interest, among other provisions.
Opposition to Reg BI
It took less than a fiscal quarter from the release date for opponents of Reg BI to file suit against the SEC in the U.S. Southern District of New York and the Second Circuit. The plaintiffs have consolidated the lawsuit and include the states of New York, California, Connecticut, Delaware, Maine, New Mexico, Oregon, and Washington, D.C., as well as XY Planning Network, an organization of financial planners working on a fee-for-service basis, and Ford Financial Solutions LLC, a registered investment adviser and member of XY Planning Network.
The plaintiffs allege the SEC has looked past the Dodd-Frank Act’s directives in making a rule which will harm the states and their residents, and that the differing requirements for registered investment advisers (RIAs) and broker-dealers to act in their clients’ best interests will cause confusion and put RIAs at a disadvantage as their rules require a more rigorous fiduciary duty. The plaintiffs believe that Reg BI is very similar to the previous suitability standard and does not address broker-dealers truly acting in the best interest of clients as the final rule was named.
As one can surmise this suit has partisan roots with the states filing being primarily Democrat controlled, opposing a Republican administration who has appointed the SEC top brass. Prior to issuance of the rule Democrats in Congress wanted the SEC to make full use of its power under Section 913(g) of Dodd-Frank to issue a uniform fiduciary standard for both RIAs and broker-dealers. However, the SEC choose to use its authority to issue a more general care act for broker-dealers.
On September 26, 2019, a U.S. District Judge dismissed the lawsuit by states and investments advisers challenging Reg BI due to the lack of subject matter jurisdiction, leaving the legal challenge in the hand of the Second Circuit Court of Appeals. No date has been set for the Appellate Court’s hearing but it will be interesting to follow and see if the Court determines the SEC did not uphold the provisions of Dodd Frank in drafting this new rule.
Keiter’s Financial Services Industry team will continue to monitor Reg BI and keep you informed of additional updates or changes. If you have questions on this or other financial services related accounting topics, please contact us. We are here to help.
Additional Reg BI Resources
About the Author
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.