New York Securities Fraud Lawyers Blog
Regulation Best Interest (Reg BI), which was instituted in June 2020, dramatically changed the relationship between broker-dealers and retail investors. Prior to Reg BI, broker-dealers owed a duty to investors to only recommend securities that the broker-dealer believed to be “suitable” for a particular investor based on such investor’s investment profile. Reg BI was implemented to replace the “suitability” standard and to impart on stockbrokers a duty owed to investors that was more analogous to the fiduciary duties owed to clients of financial advisors. Reg BI is made up of four core obligations, including a Disclosure Obligation, a Care Obligation, a Conflict of Interest Obligation, and a Compliance Obligation. If your stockbroker sold you investments that were not in your best interests or in line with your investment profile, you should contact a knowledgeable Securities Fraud Lawyer, like the lawyers at Malecki Law in New York, to determine whether you have a case.
Within Reg BI’s Care Obligation is a seemingly disregarded requirement on broker-dealers to consider “reasonably available alternatives” (RAAs) when making recommendations to retail customers. This requirement applies to recommendations of investments, account types, and even investment strategies made by a broker to their retail investor client. The RAA requirement is encompassed by a broker-dealer’s obligation to “have a reasonable basis to believe that the recommendation is in the best interest of a particular retail customer based on that retail customer’s investment profile and the risks, rewards, and costs associated with the recommendation…”
For a stockbroker to believe that a particular recommendation is in the best interest of an investor, logically the stockbroker must consider other available products that might be able to achieve the investor’s goals with less risk and/or costs. The SEC has described the RAA requirement as a “key component” in achieving compliance with Reg BI’s Care Obligation. If you have experienced investment losses from products recommended by your stockbroker and your broker failed to consider reasonably available alternatives, you should consult a Regulation Best Interest law firm, like Malecki Law in NYC.
Since Reg BI’s implementation, the Securities and Exchange Commission (SEC) has published several Staff Bulletins discussing the RAA requirement, ostensibly recognizing the lack of attention given to this important requirement by market participants. In one such Staff Bulletin, the SEC explained that “[i]t would be difficult for firms and their financial professionals to form a reasonable basis to believe a recommendation or advice is in the retail investor’s best interest without considering alternatives that are reasonably available to achieve the investor’s investment objectives.” Despite the SEC’s efforts to educate broker-dealers and their associated persons about the RAA requirement, firms are still failing on the implementation front. If your broker-dealer sold you investments without considering RAAs that could achieve your investment goals, you should consult an experienced Investment Fraud Attorney, like the attorneys at New York’s Malecki Law.
On January 30, 2023, the SEC’s Division of Enforcement published a Risk Alert detailing its observations after conducting Reg BI related examinations. According to the Risk Alert, the SEC observed significant deficiencies in broker-dealers’ implementation of Reg BI’s Care Obligation, particularly related to RAAs. The SEC explained that, while some firms instituted policies and procedures to achieve compliance with the Care Obligation, such policies and procedures “[d]irected financial professionals to consider reasonably available alternatives without providing any guidance as to how to do so.” Further, the SEC recommended that firms build on their existing RAA policies and procedures “by establishing the scope of alternatives to consider or systems to use for considering reasonably available alternatives…”
Notably, the RAA requirement applies to all broker-dealers servicing retail investors, including firms utilizing “open architecture” business models with extensive securities offerings as well as firms offering a limited “menu” of investments to investors, such as specific types of products or products in a particular sector. As the SEC has explained, “the scope of alternatives considered should be sufficient to enable the firm and its financial professionals to have a reasonable basis to believe that their recommendation or advice is in the retail investor’s best interest.” If your broker-dealer failed to offer RAAs when making recommendations to you, it would be prudent to speak with a law firm experienced in bringing Regulation Best Interest claims, like Malecki Law in NY.