SEC proposes higher standard of care for broker-dealers

by Dan Clausen
July 26, 2018

In April, the Securities and Exchange Commission (“SEC”) released a proposed set of rules addressing the different standards required of broker-dealers and investment advisers when providing investment advice to retail investors. As it currently stands, investment advisers have a fiduciary obligation to their clients to act in the client’s best interest, while broker-dealers are merely required to sell “suitable” products to their clients. The new rules, if enacted as proposed, will not create a uniform set of standards, but will somewhat level the playing field for retail customers in terms of what they can expect in dealing with either brokers or investment advisers.

The new rules, which the SEC is calling Regulation Best Interest, would require a broker-dealer to “act in the best interest of the retail customer at the time the recommendation is made without placing the financial or other interest of the [broker-dealer] ahead of the interest of the retail customer.” Among the requirements is a rule enhancing broker-dealers’ disclosure obligations to their clients. For example, brokers would have to let their clients know about potential conflicts of interest on proposed transactions. Broker-dealers would generally be prohibited from referring to themselves as “advisers” under the new set of rules when providing investment advice, clarifying what function they serve to investors.

The rules also propose that both advisers and brokers provide their clients with Form CRS, a summary of the relationship between the client and the adviser or broker. The hope is that this eliminates client confusion about what to expect from their advisers and brokers.

Additionally, the rules propose that employees of investment advisers undergo the same licensing and testing standards as broker-dealer personnel.

The rules would also require that advisers meet the same minimum capital requirements broker-dealers face, which could potentially inhibit the development of new adviser firms and require current advisers to hold additional capital on their own balance sheet.

The SEC is requesting public comment on these proposed rules, with a deadline for public comments set for August 7. The complete rules can be read and comments can be submitted on the SEC’s website, here.

Please contact BurgherGray if you would like assistance with preparing a comment letter or have any questions about the proposal.