The New Norm: Regulatory Uncertainty

Many of us within the industry are feeling the whiplash from the best interest standard. In March, the 5th Circuit Court of Appeals decided to vacate the Department of Labor’s (DOL) fiduciary rule. In April, the Securities and Exchange Commission (SEC) proposed a best interest standard for broker-dealers.

As the industry continues to provide a lukewarm reception to proposed compliance laws, regulators are competing to establish a best interest standard. The SEC’s recent proposal is one that broker-dealers should pay attention to as it requires them to follow three steps when making product recommendations:

1. Duty to disclose actions taken

Broker-dealers making recommendations would have to disclose the scope of services, fees, and all material conflicts of interest. Disclosures can be articulated through the new Form CRS (Customer or Client Relationship Summary), a standard four-page disclosure addressing items such as fees and costs the investor will pay, services provided, and conflicts of interest. The SEC would require that advisors share the form at the beginning of a new client relationship and also provide it to existing clients. In addition to disclosures, the SEC has proposed restricting the use of the titles “adviser” and “advisor” to only registered investment advisers, who are legally required to act in the best interests of their clients.

2. Exercise due diligence and care

The SEC proposal also includes both “duty of care” and “duty of loyalty” provisions. Duty of care requires broker-dealers to exercise reasonable care, skill, prudence, and diligence when making recommendations on securities or investment strategy. Duty of loyalty requires the broker-dealer to put their clients’ interests ahead of their own.

3. Declare potential conflicts of interest

To ensure clients are well aware of all conflicts between their broker and investment product providers, the SEC is proposing two requirements centered on communicating conflicts of interest. First, broker-dealer firms would have to create and document written policies to identify and disclose all conflicts of interest, such as brokers recommending products sold by their employers. Secondly, brokers will need to disclose any financial incentives, such as prizes for top performers, they would receive from their specific product recommendations.

How can you prepare?

While the ruling is now undergoing a 90-day period of public comment before the SEC publishes it, investors are demanding that their advisors act in their best interest and provide transparency. With the spotlight on this topic, even if the SEC doesn’t pass this rule, chances are that your investors will bring it up. To protect yourself and your clients, we recommend that you document and store all of your client interactions.

Automate Documentation

Grayce Turnbach

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