|The New SEC Rule for the Best Interest of Investors.
The Securities and Exchange Commission (SEC) just published “Best Interest” rules (Regulation RBI, the “Rule”) ) as applied to stock brokers. Under the new Rule, Brokers and Investment Advisors must tell you if they’re making money from what they recommend and sell. Conflicts of Interest must be disclosed. (https://www.sec.gov/rules/final/2019/34-86031.pdf.) Regulation Best Interest: The Broker-Dealer Standard of Conduct; 17 CFR Part 240; Release No. 34-86031.
This improves investor protection but still leaves brokers in the status of salespersons only who may be held liable only for “sales practice violations” such as unsuitable sales, fraud, unauthorized trading or churning. It is unclear as yet what practical effect the Rule will have beyond the existing “unsuitability “ Rule.
The Rule does not change the designation of stock brokers to a “fiduciary.” Fiduciaries (like a trustee) owe an affirmative duty of good faith, trust, loyalty and undivided interest to the client. Stock brokers remain “salespersons” responsible for “sales practice violations.” The Rule slightly enhances existing rules regarding “suitability” and related concepts of “fair dealing.” Suitability and Fair Dealing are decided on a case by case basis and the investors own actions most times are implicated as a defense in any claim against the stockbroker.
“Suitability” means, generally, that an investment recommendation must comport with the investors’ investment “objectives” and “profile” (e.g., “aggressive”, “conservative”, “income, “speculation “ etc…) with individual reference to age, sophistication, net worth, health and other factors; if the broker deviates from the investment profile, or disregards the investors financial and personal disabilities and needs, the broker can be taken to arbitration before the Financial Institutions Regulatory Authority for damages if money is lost.
The SEC Regulation Best Interest (“RBI”) Rule will have an effective date 60 days after it appears in the Federal Register stating a compliance date of June 30, 2020.
Here is more on the Rule:
RBI was written to “enhance the BD standard of conduct beyond existing suitability obligations”;
· RBI remains recommendation-based (like the existing FINRA’s Rule 2111 requiring “suitable” investments), “regardless of whether a retail investor chooses a broker-dealer (“BD”) or an investment adviser…. The retail investor will be entitled to a recommendation (from a BD) or advice (from an investment adviser) that is in the “best interest” of the customer which does not place the interest of the broker ahead of the interest of the retail investor.”;
- RBI exist at the time of the recommendation by the broker (a registered investment advisor has a continuous obligation, by contrast);
- The RBI standard is not satisfied by disclosure of a conflict of interest, for example, standing alone;
- “Best Interest” is decided on a case by case basis with reference to the following elements:
Care. They (broker-dealers) will be required to exercise reasonable diligence, care, and skill when making a recommendation. Risks and rewards must be understood and requires that the broker’s interest not be placed ahead of the customer’s.
Disclosure. A broker-dealer will be required to disclose fees, conflicts and the broker’s capacity to provide requested services.
Other financial professionals are fiduciaries under the law, but not a broker. Those who have a fiduciary duty are registered investment advisers, certified public accountants or a lawyer.
|Of importance, a Broker must disclose if account monitoring services will be provided.
|“…the retail investor will be entitled to a recommendation (from a BD) or advice (from an investment adviser) that is in the best interest of the retail investor and that does not place the interest of the firm or the financial professional ahead of the interest of the retail investor”;
If a broker is taken to arbitration, the investor is not required to prove “Scienter”, which means mental knowledge, either intentionally or recklessly delivered, that the investor’s Best Interest was not served.
Anthony M. Abraham, Esq., PC, has represented many investors who have claimed against brokers and investment advisors for unsuitable investments, fraud, churning and other sales practice violations. If you were victimized and need help, please call us Toll Free at 1-877-430-4877 for a Free Consultation or email us at Anthony@AbrahamAttorneys.com.