The U.S. Securities and Exchange Commission has established a rule to help clarify broker-dealers’ obligations when recommending investments to their customers. This rule is intended to clarify the broker-dealers’ responsibilities and prevent situations in which the broker-dealers places their financial interests above those of their customer.
If you believe your broker recommended an investment that was not in your best interest or failed to disclose the investment’s potential risks, you may have grounds to take legal action against the broker-dealer or brokerage firm. The broker misconduct attorneys from Erez Law, PLLC can investigate your claim and pursue compensation for the losses you have suffered. Contact us today to discuss the details of your situation during a free and confidential consultation.
What Is Regulation Best Interest (BI)?
Regulation Best Interest is a Securities and Exchange Commission (SEC) rule that establishes the best interest standard of conduct for broker-dealers and similar parties. Under this rule, broker-dealers can only recommend financial products to their customers that are in the customer’s best interests and holds broker-dealers to a higher standard.
Some of the key aspects of Reg BI are:
- Broker-dealers who are recommending any security to a retail customer must act in the customer’s best interest without putting their own financial interest ahead of the customer’s interest.
- Broker-dealers must clearly identify and divulge any potential conflicts of interest and financial incentives for making investment recommendations.
- Broker-dealers must stop referring to themselves as advisors if they are not held to a fiduciary standard.
- Brokers must provide their clients with Form CRS (a client relationship summary), which outlines the firm’s services, all fees, costs, conflicts of interest, obligatory standards of conduct related to its services, and a review of the firm’s disciplinary or legal history.
- Brokers must disclose information about their recommendations and why they are recommending the investment.
- Brokers must exercise diligence, care, and skill when making recommendations and must have a reasonable basis to believe their recommendation is in their customer’s best interest.
- Brokers must implement policies that prevent potential conflicts of interest.
- Brokers must comply with policies designed to fulfill their obligations.
How Does Reg BI Impact Me and My Broker/Financial Advisor Relationship?
Reg BI can help give you better peace of mind because it requires that brokers only focus on your best interest when recommending a particular investment. The regulation helps to create a more transparent investment marketplace.
Here are some steps you can take to ensure your broker meets their obligations under Reg BI:
- Read Form CRS – Reg BI requires brokers to disclose why they are making recommendations to their customers, as well as their legal obligations to them.
- Review your broker’s registration – The SEC’s Investment Adviser Public Disclosure tool allows investors to research an individual broker or firm by their name and location to see if they are a Registered Investment Adviser or broker.
- Seek a second opinion – If you are not comfortable with your broker’s investment recommendations for any reason, you can seek a second opinion from another adviser.
What Are the Four Obligations of the Reg BI Best Interest Rule?
Under Reg BI compliance, a broker-dealer fulfills its responsibilities under the SEC best interest rule when they adhere to the following four obligations: disclosure, care, conflict of interest, and compliance.
Here is what you need to know about the SEC regulations for care, disclosure, conflict of interest, and compliance:
Under the care obligation, the broker must exercise reasonable diligence, care, and skill when making investment recommendations. This requires brokers to:
- Understand the potential risks, rewards, and costs associated with their recommendations
- Have a reasonable basis to believe the investment is in the best interest of some customers and the particular investor when making the recommendation
- Not place their interests above the investor’s interests
- Have a reasonable basis to believe a series of recommended transactions are in the customer’s best interests when making them
The disclosure obligation requires broker-dealers to disclose material facts about the investment recommendations they make to customers. They must provide full and fair written disclosures of:
- A statement that the broker is acting in this capacity
- The material fees and costs that apply to the transaction in question
- The type and scope of services the broker is providing to the customer
- Any conflicts of interest and material facts associated with them
3. Conflict of Interest
Broker-dealers are required to establish, maintain, and enforce written policies to identify and accurately disclose potential conflicts of interest. These policies must:
- Mitigate conflicts of interest that create a financial incentive for a broker to put their own interest ahead of the customer’s
- Disclose and prevent material limitations on their offerings, such as a limited product menu, in order to avoid placing the broker’s financial interests above the customer’s
- Eliminate sales contests, sales quotas, bonuses, and non-cash compensation based on the sale of certain products or offerings within a limited amount of time
The compliance obligation requires brokers to establish and implement written policies and procedures to achieve compliance with Reg BI. Meeting the compliance obligation may require the broker to do the following to ensure compliance with Reg BI:
- Establish controls
- Train brokers on Reg BI
- Conduct periodic reviews and testing
- Adjust systems of supervision and compliance
- Remediate non-compliance
What Should You Do if Your Broker Does Not Act in Your Best Interest?
If you believe that your broker or brokerage firm is not following these SEC requirements can also seek the guidance of a broker misconduct attorney from Erez Law, PLLC. A lawyer can review applicable SEC guidance, the events that transpired, and customary actions in the industry to determine if your investor has violated rules and is responsible for any financial losses you suffered because of their misplaced recommendations. Contact us for a free and confidential case review.