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Best Interests Regulation Still Facing Questions, Criticisms

The House Financial Services recently held a hearing on the controversial Regulation BI, which the SEC is expected to adopt sometime in 2019.  The committee memo provided a status update on the proposal, which consists of: (1) a “best interest” standard of conduct for brokers (“Regulation Best Interest” or “Reg BI”); (2) guidance on the fiduciary standard of conduct for investment advisers; and, (3) a relationship disclosure document for brokers and investment advisers (“Form CRS”). The SEC also has proposed prohibiting professionals that are not registered investment advisers from calling themselves “adviser” or “advisor.” The House committee notes, however, that the SEC’s proposal did not address the other titles that professionals may use like wealth manager or financial consultant, among others.  The SEC’s testing of Form CRS to date has been mixed, with some investors reporting “areas of confusion.”  Former SEC Commissioner Kara Stein held strong opinions against the SEC’s proposal, and Commissioner Robert Jackson has voiced concerns regarding the adequacy of the regulations. Jackson said recently he could not support passing Reg BI, or Form CRS because the cost-benefit analysis performed by the SEC thus far is subpar and could leave the regulation open to litigation, according to an article in ThinkAdvisor. Meanwhile, states such as Maryland, Nevada, New Jersey, and New York are in the process of adopting their own fiduciary standard for brokers. Industry groups have cautioned that this approach may result in a patchwork of regulation. A Finra leader at a recent conference said the organization may re-examine its suitability rule when the SEC adopts Regulation BI because of overlap between Finra’s suitability rule and Regulation BI, Pensions & Investments, reported. FINRA’s suitability rule requires, in part, that a broker-dealer or associated person has “a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer.”

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