Last week, the Securities and Exchange Commission passed a package of regulations aimed at reforming standards for brokers and financial advisors providing investment advice. According to the SEC, the regulations are “designed to enhance the quality and transparency of retail investors’ relationships with investment advisers and broker-dealers, bringing the legal requirements and mandated disclosures in line with reasonable investor expectations, while preserving access (in terms of choice and cost) to a variety of investment services and products.” The regulatory package includes new Regulation Best Interest, the new Form CRS Relationship Summary, and two separate interpretations under the Investment Advisers Act of 1940.

Regulation Best Interest and Form CRS will become effective 60 days after they are published in the Federal Register. Firms will have until June 30, 2020 to come into compliance. The two interpretations under the Advisers Act will become effective upon publication in the Federal Register.

Regulation Best Interest

In a 3-to-1 vote, SEC commissioners approved the Regulation Best Interest, commonly referred to as “Reg BI” which requires brokers to act in the best interest of a retail customer when making investment recommendation and prohibits brokers from putting their financial interests ahead of those of their customer. While registered investment advisers (RIA) are currently held to fiduciary standard which requires them to act int the best interest of their clients, in some jurisdictions, based upon the facts and circumstances of the case, brokers are only held to a suitability standard. Under the existing suitability standard, a broker may recommend an investment or insurance products with high commission even when comparable products with lower fees and commissions are available so long as the product is suitable for the customer. Since these fees and commissions are deducted from the amount of the investment, brokers must take into consideration the costs of the investment to determine whether it is in the customer’s best interest in light of those costs.

Reg BI also protects customers by requiring better disclosure of conflicts of interest and preventing certain conflicts of interest. Reg BI eliminates sales contests and bans brokers from receiving incentive perks like vacations and other gifts for selling certain products to their customers. Critics of the new regulation are concerned that these reforms are not enough to protect investors because it does not prohibit commission-based pay and provides brokers too much latitude to determine what constitutes a customer’s best interest.

Form CRS

Registered investment advisers and brokers are now required to provide retail investors with document summarizing their relationship called the Form CRS Relationship Summary. The Form CRS Relationship Summary will inform investors about:

1. the types of client and customer relationships and services the firm offers;
2. the fees, costs, conflicts of interest, and required standard of conduct associated with those relationships and services;
3. whether the firm and its financial professionals currently have reportable legal or disciplinary history; and
4. how to obtain additional information about the firm.

The SEC touts that Form CRS will provide retail investors with easy-to-understand information in a standardized question-and-answer format so that investors readily compare different services and firms. Form CRS will also include a link to the SEC’s investor education website, Investor.gov, which features educational materials for investors.

A Small Step in the Right Direction

Consumer advocates believe that Reg BI and the other reforms are a win for Wall Street and do not do enough for investors. Reg BI is far weaker than the U.S. Department of Labor’s 2016 fiduciary rule which was challenged by the financial industry and vacated by the U.S. Court of Appeals for the Fifth Circuit in June 2018. As SEC investor advocate Rick Fleming put it, “Regulation Best Interest, while not as strong as it could be, is a step in the right direction because it is an improvement over the existing suitability standard for broker-dealers.”

If you believe that you have been misled by a financial advisor or wish to engage the services of a securities lawyer, please call the Costello Law Group at 410-832-800 (or Toll Free 877-418-0003) for a free consultation. Tom Costello of the Costello Law Group has 25 years of experience in stockbroker misconduct and investment fraud.