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Regulation Best Interest

Saturday, April 21, 2018

This biggest issue with the financial services industry is the fact that investment advisers are required to operate at a disadvantage; advisers are defined as a fiduciary while broker dealers are not. In short, what this means is that investment advisers are expected to operate under high ethical standards, while broker dealers have the ability to recommend the purchase or sale of products, at will, without being held accountable for recommendations that may or may not have been made for the benefit of the client.

Well, the SEC has finally decided to take on the broker dealer community in regard to this issue with Regulation Best Interest. The SEC has voted to “a package of rulemakings and interpretations” which will seemingly even the playing field and hold the broker dealer community accountable for the recommendations being made to clients by their registered representatives.

If passed, Regulation Best Interest will have a positive impact on the way registered representatives deal with their broker dealer customers. Theoretically it will eliminate some of the trading in client accounts that historically are executed not for the actual benefit of the client and per their investment objectives, but for the purpose of generating trading fees for the broker dealer and commissions for their registered representatives.

Although the rulemaking will address investment advisers, the investment adviser community is already deemed to be a fiduciary to its clients, and based on a summary of the proposed regulation, would just reiterate what it means to be a fiduciary and require additional disclosure. New disclosure requirements would affect both investment advisers and broker dealers. The regulation will require both to outline how the entity operates (as a registered investment adviser or a registered broker dealer), what the registration means, how the registration affects the relationship between the registrant and the client, and how the registrant is compensated.

Although not a fan of government regulation, this proposed regulation appears to be well thought out. Finally, it appears that the regulatory community has opted to institute smart regulation as opposed to inundating the market with more burdensome regulation. The SEC’s news release regarding Regulation Best Interest can be found via this link.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes. 

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