Regulation Best Interest: What investors should keep in mind


Investors stand to benefit from new transparency requirements set to take effect this summer. Regulation Best Interest, adopted by the Securities and Exchange Commission (SEC) last year, will require brokers to follow updated guidelines when making recommendations to a retail customer.

What should investors know about these new standards? Here is a brief overview.

A summary of Regulation Best Interest

These new standards, which will become effective June 30, 2020, apply to broker activities for securities transactions or investment strategy involving securities, including account recommendations. Broadly speaking, Regulation Best Interest imposes new rules on brokers regarding disclosure and conflict of interest.

This general obligation can be broken down into four components:

  • Disclosure obligation – Providing the client certain information, such as material fees and costs
  • Care obligation – Exercising “reasonable diligence, care, and skill” when making a recommendation
  • Conflict of interest obligation – The existence of policies and procedures to address conflicts of interest
  • Compliance obligation – Establishing, maintaining and enforcing policies that ensure compliance with Regulation Best Interest

For example, when making a recommendation to a retail customer, a broker is prohibited from placing any interests, including their own, before the interests of their client.

Investors should remain cautious

While these new regulations should help discourage certain behaviors, investors should not let their guard down. As the Wall Street Journal points out, brokers may still be able to engage in risky practices, as long as they ensure all regulatory requirements have been met.

For example, brokers can still move clients toward expensive alternative investments, such as complex annuities or real estate funds, as long as they believe those decisions are in your best interest. Similarly, a broker is not obligated to recommend the least-expensive option – they are only required to compare all possibilities before making such a recommendation.

This is a brief, simplified summary of Regulation Best Interest which, in totality, takes up 770 pages. What is the most important thing investors should keep in mind? While these new rules offer another layer of protection, imprudent behavior by a broker is still possible. Remain vigilant, and know when to seek outside legal support.