SEC Regulation Best Interest: The Broker-Dealer Standard of Conduct

The Securities and Exchange Commission adopts new rule 17 CFR 240.15l-1, establishing Regulation Best Interest as a standard of conduct for broker-dealers and their associated persons when making recommendations to retail customers. This rule enhances existing suitability obligations by requiring broker-dealers to act in the retail customer's best interest without placing their own financial interests ahead of the customer's, a standard that cannot be satisfied through disclosure alone. The regulation mandates four component obligations: a Disclosure Obligation to provide written material facts about the relationship and costs; a Care Obligation to exercise reasonable diligence and skill; a Conflict of Interest Obligation to identify, disclose, and mitigate or eliminate material conflicts; and a Compliance Obligation to maintain policies ensuring adherence to the rule. Additionally, the Commission amends rules 17 CFR 240.17a-3 and 17 CFR 240.17a-4 to impose new record-making and recordkeeping requirements, with the rule becoming effective on September 10, 2019.

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Conformed to Federal Register version
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
Release No. 34-86031; File No. S7-07-18
RIN 3235-AM35
Regulation Best Interest: The Broker-Dealer Standard of Conduct AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: The Securities and Exchange Commission (the “Commission”) is adopting a new rule under the Securities Exchange Act of 1934 (“Exchange Act”), establishing a standard of conduct for broker-dealers and natural persons who are associated persons of a broker-dealer (unless otherwise indicated, together referred to as “broker-dealer”) when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities (“Regulation Best Interest”). Regulation Best Interest enhances the brokerdealer standard of conduct beyond existing suitability obligations, and aligns the standard of conduct with retail customers’ reasonable expectations by requiring broker-dealers, among other things, 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 interests of the retail customer; and address conflicts of interest by establishing, maintaining, and enforcing policies and procedures reasonably designed to identify and fully and fairly disclose material facts about conflicts of interest, and in instances where we have determined that disclosure is insufficient to reasonably address the conflict, to mitigate or, in certain instances, eliminate the conflict. The standard of conduct established by Regulation Best Interest cannot be satisfied through disclosure alone. The standard of conduct draws from key principles underlying

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