Exceptional and accessible legal representation across Kentucky and Nationwide

Exceptional and accessible legal representation across Kentucky and Nationwide

EXCEPTIONAL AND ACCESSIBLE LEGAL REPRESENTATION ACROSS KENTUCKY AND NATIONWIDE

From suitable investment advice to that in the best interest of retail clients

| Dec 9, 2020 | Securities Law And Litigation |

Recently, we discussed the relatively new Regulation Best Interest (Reg BI) promulgated by the Securities and Exchange Commission (SEC) that imposes on broker-dealers an enhanced standard of care toward their retail customers. Since June 30, 2020, broker-dealers and their employers have been held to the “best interest” standard in their dealings with retail customers.

Giving investment advice in the best interest of a retail customer (a person or their legal representative using investment for personal, family or household purposes) requires reaching a higher bar than the previous “suitability” standard. Still, it is not as demanding as the even higher “fiduciary” standard to which the law holds investment advisors.

Reg BI details broker-dealer obligations of disclosure, care, conflict of interest and compliance required to meet the new standard.

Bumps in the transition are possible

The Financial Industry Regulatory Authority (FINRA), which licenses and disciplines broker-dealers, provides a checklist to assist financial advisors with transition from the suitability to the best-interest standard.

Reg BI aims straight at broker-dealer conflicts of interest such as selling securities for which they will receive commissions or other perks. The likelihood for investment advice that is not necessarily in a customer’s best interest naturally increases if the advisor will make money from the transaction they recommend.

Accordingly, the SEC on its online Reg BI FAQ page explains that the regulation requires the elimination of certain listed broker-dealer sales incentives, but that others may also violate Reg BI. Where the law does not require elimination (but it still might be advisable) of certain programs that create conflicts, mitigation to reduce the magnitude of the conflict and disclosure to customers are essential.

A recent article in FinancialPlanning explores the nature of such conflicts within a large insurance company where its broker-dealers are incentivized and expected to sell annuity and insurance products of the employer to retail customers. A “captive” broker-dealer in this situation faces challenges to meet work responsibilities in compliance with Reg BI.

Takeaways

As broker-dealers adjust to their new middle best-interest ground between a suitability standard and that of a fiduciary, they may require advice from a seasoned securities lawyer to understand what Reg BI requires. Legal representation may be necessary if they find themselves accused of falling short of advising in a retail customer’s best interests.

Likewise, a retail investor may have concern whether the investment advice they received was in their best interest, especially if a broker-dealer recommended the purchase of securities tied to the broker-dealer’s agency or firm. A knowledgeable securities attorney can investigate the relationship and provide guidance, including potential legal remedies for losses.