Regulation Best Interest!

Let’s talk about Regulation Best Interest. It’s been brewing for a while. For decades, investment advisers have (appropriately!) borne fiduciary duties to their clients, while broker-dealers have worked under the considerably looser suitability standard codified in FINRA Rule 2111. As it happens, many broker-dealers don’t just sell financial products and some actually veer into recommending which products their customers should buy. It’s enough to make a sailor blush.

So at least since the passage of the Dodd-Frank Act in 2010, people have been talking about imposing fiduciary obligations on broker-dealers, essentially merging the fiduciary and suitability standards into one for broker-dealers and investment advisers. Many broker-dealers didn’t exactly love this plan, and after much discussion, Regulation Best Interest has emerged. It sort of threads the needle between the suitability and fiduciary standards. As the SEC puts it in its Small Entity Compliance Guide, “When making . . . a recommendation to a retail customer, you must act in the best interest of the retail customer at the time the recommendation is made, without placing your financial or other interest ahead of the retail customer’s interests.”

We’ll talk about what all that means, and what new obligations are imposed by Regulation Best Interest on both broker-dealers (mostly) and investment advisers (some) in a series of posts here at Cady.