A few weeks ago, the SEC proposed the Regulation Best Interest rule, which requires brokers to act in the best interest of each retail customer at the time the recommendation is made — notwithstanding the broker’s own financial interests.

However, the regulator doesn’t define the term "best interest" in 400-plus pages.

Now that the U.S. Court of Appeals has vacated the DoL rule and the SEC has proposed its own rule, what should brokers expect from the upcoming regulation? The truth is the current state of the law remains unclear.

Here are 10 things you need to know about the proposed regulation:

AARP fiduciary survey
  1. Reasonable basis. A broker must have a reasonable basis that the recommendation is in the best interest of the client.
  2. Applies to retail customers. A retail customer is defined as a person who uses the recommendation primarily for personal, family, or household purposes.
  3. “Recommendation” remains the same. The proposal does not seek to change the definition of “recommendation,” preferring to defer to the current FINRA interpretations.
  4. No definition of “best interest.” In more than 400 pages, the SEC never defines the term “best interest” when proposing Regulation Best Interest.
  5. More than suitability, less than fiduciary. Regulation Best Interest combines elements of the current suitability standard (e.g. suitable at time of transaction) with a few fiduciary-like elements (e.g. disclosure).
  6. Fails to harmonize RIA and BD standards. Advocates of a uniform fiduciary standard want a single standard so that consumers are not confused by the differing standards of care applicable to advisers vs. brokers. This proposal fails to ensure a “uniform” standard.
  7. Disclosure of conflicts of interest. The most significant new requirement is that brokers must disclose (or mitigate) conflicts of interest.
  8. Must consider series of transactions. Expanding traditional suitability, a broker must also consider the series of recommended transactions.
  9. Product neutrality not required. Brokers can make more money on recommended products, including proprietary products, so long as the conflict is properly disclosed and mitigated.
  10. Regulation Best Interest is not law. Comments are due on this controversial proposal by August 7, 2018. Thereafter, we expect much debate and re-drafting before any final rule is adopted.
Todd Cipperman

Todd Cipperman

Todd Cipperman is managing principal of Cipperman Compliance Services, a firm that offers a third-party perspective on regulatory compliance.