Regulation Best Interest ?

Under the SEC’s proposed Regulation Best Interest, the SEC says a broker-dealer would be required to act in the best interests of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer. This is the SEC’s plan to displace the Department of Labor’s uniform fiduciary standard for retirement accounts which was adopted after YEARS of analysis.

According to the SEC, Regulation Best Interest is “designed to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations.” If that is its design, the SEC should go back to the drawing board.

Although I have not read the entire almost 1,000 page proposal, here are my initial thoughts.

Best Interest Standard not defined

First, the proposal creates a new “best interest” standard that is not defined. It will take years for the meaning of “best interest” to be worked out.  Meanwhile, investors will be gouged by the financial services industry.

Not uniform standard

Second, the proposal does not establish a uniform fiduciary standard for investment accounts. Confusion benefits the financial services industry. This proposal creates more confusion.

Title reform?

Third, the proposal’s “title reform” is extremely limited and the financial services industry can easily make it meaningless. Under the proposal, firms solely registered as broker-dealers and individuals working for those firms would be prohibited from using a title with the word “adviser” or “advisor.” While that sounds good, it is easy for a broker-dealer to circumvent the prohibition by becoming dually-registered as both broker-dealer and investment adviser. Those firms and individuals who are simultaneously acting as broker-dealer and registered investment adviser (which includes the household names) can continue to hold themselves out as an “adviser”.

How proposal could hurt Mrs 401K

Here is a concrete example of how this proposal could hurt investors.

Let’s say Mrs. 401K chooses to work with a “financial advisor” at a major Wall Street firm because that person is an “investment adviser” (a fiduciary). She did a little research and made a point of seeking out an investment adviser should could trust to handle her investments. After opening her accounts, Mrs. 401K gets a giant packet of papers. She, like the rest of, does not read the “disclosure” buried in the packet stating that her “investment adviser” does not owe her fiduciary duties because the accounts she opened were not investment advisory accounts, but brokerage accounts. How does that help Mrs. 401K?

In my opinion Mrs. 401K is worse off. She would have been better off if she knew nothing about investment advisers but viewed them all as hucksters. This is not an unusual situation.

Regulation Status Quo

I agree with SEC Commissioner Kara Stein who voted against releasing the proposal. As Commissioner Stein put it:

because there is no definition of the best interest standard in the proposal, the name of the rule, in and of itself, is confusing. Calling the proposal Regulation Best Interest could cause retail investors to reasonably believe that broker-dealers are required to act in their clients’ best interests. Perhaps it would be more accurate to call this proposal “Regulation Status Quo.” Calling it Regulation Best Interest is not just confusing, it is in effect a form of mislabeling, which may be misleading and which could have deleterious consequences.  Indeed, one of the recommendations we are considering today is a proposal to restrict the use of the terms “advisor” and “adviser” by a broker-dealer unless it is also registered as an investment adviser. We should be logically consistent ourselves.

Many thanks to Professor Ben Edwards for his blog post on this issue. I look forward to preparing comments on this proposal with him and other PIABA members.

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Lisa Bragança recovers losses for investors all over the country, protects whistleblowers, and defends individuals and businesses in government investigations. As a Branch Chief with the SEC Division of Enforcement, Lisa investigated a wide range of investment fraud and Wall Street misconduct.

You can reach Lisa at (847) 906-3460 or

Disclaimer: This information is for general purposes only and should not be interpreted to indicate a certain result will occur in your specific legal situation. The information on this website is not legal advice and does not create an attorney-client relationship.