Back in 2018, the Securities and Exchange Commission (SEC) proposed a new rule, commonly called Regulation Best Interest. This rule would raise the standard for how broker-dealers act in the best interest of their customers when they make a financial recommendation.
And the SEC will vote on this proposed rule on June 5.
A closer look at Regulation Best Interest
According to a CNBC News article published at the time of the proposal, Regulation Best Interest would require brokerage firms to:
- Disclose all relevant details to the customer
- Demonstrate reasonable care and diligence in the investor’s interests
- Reduce or eliminate all conflicts of interest or financial incentives
The rule essentially asserts that broker-dealers must offer reliable advice that best serves the investor’s present and future needs at the time of the recommendation. This is because the SEC proposed in the rule that the quality broker-dealer recommendations will improve when they put the customer first.
This standard of conduct already exists. Broker-dealers already have an implied responsibility to put the customer first. But the SEC claims that the new rule would expand the power of that responsibility and better protect investors.
Disagreements on both sides
Regulation Best Interest has garnered criticism from both brokerage firms and customer advocates. Brokerage firms claim that the new rule to reform their advice is too vague. Without a specific definition of what is in the client’s best interests, then broker-dealers can only use their best judgment when they make a recommendation. And every customer has different needs—which means their best interests will vary from another customer’s.
Meanwhile, customer advocates believe that the rule does not offer enough protections for investors. They claim it concentrates more on broker-dealers disclosing conflicts of interest, instead of eliminating them.
The SEC will decide on June 5
Despite the widespread frustration with this new rule, the SEC plans to vote on the rule on June 5. Presumably, the SEC has responded to criticism from both sides and made a few revisions to the original proposed rule.
If the SEC approves the rule, then broker-dealers will have to adjust their standard of care to meet these new rules. But it remains to be seen if broker-dealers will have specific guidelines they can refer to, so they can meet this standard.