The House of Representatives has voted to block funding for the highly contentious four-pronged investment advice reform package deemed “Regulation Best Interest” through an amendment to the Financial Services and General Government Appropriations Act. Huge fiduciary duty proponent, Rep. Maxine Waters, D-California proposed this amendment which prevents the SEC from using any funds under the Act to enforce Regulation Best Interest. The amendment could halt the SEC’s recently approved advice package, which includes Regulation Best Interest, Form CRS Relationship Summary and the agency’s interpretations of two concepts under the Investment Advisors Act. Our investor fraud attorneys echo Maxine Waters sentiments that the final rules fail to include the much-needed fiduciary duty and only facilitates further confusion, which is a far cry from strengthening investor protection.
Regulation Best Interest emerges a year the courts repealed Obama Era’s Department of Labor’s fiduciary standard, which required advisors to put their client interests first. Historically, the regulatory landscape distinguished between financial advisors who were obligated to legitimately act as fiduciaries and brokers not held to as stringent of a standard. Investment advisors are required to show an ongoing duty of loyalty and care, in serving their clients best interests at all times under the Investment Advisors Act of 1940. Meanwhile, brokers were only obliged to meet a “suitability standard,” according to FINRA rules, when recommending securities to investors. Under FINRA rule 2111, brokers must have a “reasonable” belief that a potential investment product or strategy is “suitable” for the investor based on the customer’s age, objectives, risk tolerance, and other information.
The most significant rule included in the standards reform package, Regulation Best Interest is intended to strengthen the duty of care owed by brokers above just the suitability standard. The SEC claims that the regulations would disclose conflicts and clarify the duties owed to investors. However, under these rules, broker-dealers are only required to disclose, but not necessarily mitigate any conflicts of interests with investors, unless state law is more strict. With this in mind, brokers are still not required to put their client’s interests entirely before their own genuinely if state law does not provide protection. Essentially, brokers can now advertise themselves as serving their clients’ “best interest” while not putting their clients’ interests first absent state prohibitions. While more disclosures are always beneficial, Regulation Best Interest fails to raise the standard of care enough to help investors not get taken advantage of by unscrupulous financial professionals.
Alongside the Regulation Best Interest rule, the Form CRS relationship summary that broker-dealers and investment advisors will be required to provide to new retail customers has also been controversial. The Form CRS is intended to be an easily comprehensible document that describes the legal standard of conduct imposed upon the financial professional. However, investor fraud lawyers believe that Form CRS is not so easy for investors to read without assistance. The SEC’s interpretation of the distinction between broker-dealers and investment advisors, as well as “solely incidental” in the Investment Advisors Act also weakens broker obligation to investors.
Regulation Best Interest will not go into effect until June 2020, so there will be some time before the industry makes any changes. Additionally, FINRA still has to come up with their own guidance and interpretation to accompany Regulation Best. In the meantime, Regulation Best Interest will continue to face legal pushback on top of the House’s passing of Maxine Waters’ amendment. As the industry quarrels over the new rules, states, like New Jersey, Nevada and Massachusetts have moved forward with proposing their version of the fiduciary standard.
Our investor fraud attorneys will continue to monitor the progress of Regulation Best Interest and advocate for a robust and clear standard of care. In the past, our team of securities lawyers has gone to Congress to support a strict fiduciary standard as part of our commitment to bolster investor protection.