Compliance Corner: What is the SEC’s Regulation Best Interest?

On June 5, the Securities Exchange Commission (SEC) voted on a new regulation known as Regulation Best Interest (Reg BI). The purpose of this new rule is to place a standard on broker-dealers that is stronger than the suitability standard they’ve had to adhere to in the past. In addition, the purpose of this new rule is to help educate investors. According to the SEC, there’s a lot of investor confusion about the difference between broker-dealers and registered investment advisers and the regulations that apply to each.

Fort Pitt is NOT a broker-dealer. Fort Pitt IS a registered investment adviser. Fort Pitt has always been held to a fiduciary standard that encompasses all of the requirements listed below. Since its inception Fort Pitt has focused on putting our clients’ interest first and providing investment management services in the best interest of our clients. The new Reg BI outlines four obligations that are new to broker-dealers. Below is a brief summary:

  1.  Disclosure: The Client Relationship Summary (CRS) is a two-page standardized disclosure statement that has been created to educate investors. It’s designed to allow individuals to compare the services provided and fees charged by registered investment advisers and broker-dealers and make informed decisions regarding the service provider that’s most appropriate for them. Registered investment advisers — including Fort Pitt — must provide individual investors with Form CRS at the time that the investment management agreement is signed and must post Form CRS to the firm’s website.
  2. Duty of Care: Firms have to use reasonable diligence, care, and skill when making a recommendation to a client. This means that recommendations provided to individual investors must be based on that client’s specific investment profile. Fort Pitt has done this since the very beginning; however, for the first time, broker-dealers have to be able to justify why they are recommending one product over another. They need to understand the cost to the investors and illustrate why they think an investment is appropriate for that individual. 
  3. Conflicts of Interest: Firms must address issues related to conflicts of interest.For example, if there are any incentives to recommend one product over another, that has to be disclosed to clients so that they are fully informed when making investment decisions. This part of the rule also eliminated sales contests and quotas for broker-dealers to avoid further conflicts
  4. Compliance. Broker-dealers need to establish policies and procedures that align with the Reg BI. This helps to ensure that the regulations are followed through on the firm-level.

While the rule was approved this June, firms have until June 30, 2020 to comply. We recommend you ask questions and get curious to make sure your adviser is working with your best interests in mind. As more comes out about regulation and compliance, we’ll be sure to share it here on Ramparts!