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SEC Releases Further Guidance On Standards of Care For Broker-Dealers and Registered Investment Advisers Regulation Best Interest

Gary Fox
Gary Fox
Regional Director

Amidst the steady stream of rule proposals for cybersecurity, custody, and Regulation SP, as well as updating private fund reporting, the Securities and Exchange Commission (SEC) recently offered some further guidance on Regulation Best Interest (Reg BI) for broker-dealers and the fiduciary responsibilities for registered investment advisers (RIAs) as both relate to the concept of “care”. With all the midnight oil being burned at SEC headquarters, and countless compliance staffs’ offices as well, it’s OK if you missed this one. Here is the summary of the newest guidance.

Using the standard “question and answer” style of addressing various scenarios, the release specifically focused on the “Care Obligation of Regulation Best Interest (‘Reg BI’) for broker-dealers and the duty of care enforced under the Investment Advisers Act of 1940 (the ‘IA fiduciary standard’) for investment advisers (together, ‘care obligations’)”.

Given how a duty of care can be broadly interpreted, and potentially misunderstood, the first notable comment in the release states that while Reg BI and RIA fiduciary standards are different, the SEC believes “they generally yield substantially similar results in terms of the ultimate responsibilities owed to retail investors.” While providing the usual proviso that ultimately every scenario comes down to the specific facts and circumstances of that situation, the release starts by providing three important components of the care obligation:

  • Understanding the potential risks, rewards, and costs associated with a product, investment strategy, account type, or series of transactions (the “investment or investment strategy”);
  • Having a reasonable understanding of the specific retail investor’s investment profile, which generally includes the retail investor’s financial situation (including current income) and needs; investments; assets and debts; marital status; tax status; age; investment time horizon; liquidity needs; risk tolerance; investment experience; investment objectives and financial goals; and any other information the retail investor may disclose in connection with the recommendation or advice; and
  • Based on the understanding of the first two elements, as well as, in the staff’s view, a consideration of reasonably available alternatives, having a reasonable basis to conclude that the recommendation or advice provided is in the retail investor’s best interest.

While we highly recommend reading the full release here, we have extracted a few choice statements that every firm with retail investors should consider very closely.

  • …a firm or financial professional cannot satisfy its obligations simply by recommending the lowest cost option
  • My firm has reviewed and compiled an approved list of investments for our retail investors. Can I rely solely on the firm’s review to satisfy my own obligation to understand the investment or investment strategy I am recommending or on which I am providing advice? NO.
  • My firm has a limited menu of investments. Do I have to consider all of them when evaluating reasonably available alternatives? It depends.
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