New SEC rule may change your life

Steve Merrell |

If your financial advisor works for a broker-dealer, the new regulation passed last week by the Securities and Exchange Commission just might change your life. At the very least, it will change the relationship you have with your broker. The rule, called “Regulation Best Interest” (also known as “Reg BI”), is part of a group of regulations which the SEC says are “designed to enhance the quality and transparency of retail investors’ relationships with investment advisors and broker-dealers.”


Reg BI requires broker-dealers and their affiliated persons to always act in the “best interest” of a retail customer when they make any securities-based recommendation. While the intent is good, the actual execution of this new regulation could be tricky since the regulation does not even define the term “best interest.” Instead of giving a blanket definition, Reg BI requires an analysis of the circumstances surrounding a particular recommendation for a particular customer.


You can think of Reg BI as a compromise between the current “suitability standard” that brokers have long followed and the “fiduciary standard” that many regulators and political leaders have been advocating. Under the suitability standard, broker-dealers and their employees are only required to make “suitable” recommendations to their clients. They have no obligation to act in the clients “best interest,” nor must they avoid conflicts of interest.


While the new standard does not turn broker-dealers into fiduciaries, it certainly prompts them to start acting more like fiduciaries. The SEC has very clear ideas about the kinds of behaviors it wants to encourage or eliminate among broker-dealers.


First, Reg BI requires broker-dealers to fully disclose in writing all material facts about how they are connected to the proposed transaction or recommendation. The disclosures must include all material facts about the capacity in which the broker-dealer is acting, the fees the broker is earning and who is paying them, the type and scope of services provided, as well as any conflicts of interest that may be present. For example, if your broker is trying to get you to buy a particular stock, Reg BI will require them to disclose if they are getting paid a placement fee for selling the stock.


Other required disclosures include transactions such as recommendations to roll over or transfer assets from retirement plans into IRAs. They also include “recommendations to hold” that may result from account monitoring. In other words, broker-dealers and investment advisors need to support their recommendations even if their recommendation is simply to hold on to an existing position.


Second, broker-dealers are required to exercise “reasonable diligence, care and skill when making a recommendation to a retail customer.” This doesn’t sound much different than past requirements, but the details are more explicit. For example, under Reg BI, the broker must explicitly consider the costs of the recommendation and how they will affect your investment performance.


Third, the broker-dealer must maintain and enforce written policies and procedures designed to identify, disclose and eliminate conflicts of interest. In particular, broker-dealers need to eliminate incentives that might cause an associated person to place the firm’s interests ahead of yours. This can include things such as sales contests, quotas, bonuses or preferential commission rates for specific securities.


Critics say Reg BI doesn’t go far enough, that it leaves too many loopholes for unscrupulous financial marketeers to exploit. Proponents say the new rules and disclosure requirements will provide a degree of consumer protection that has been missing for far too long. The reality is that this measure, though imperfect and incomplete, is a step forward. It may not provide bullet-proof protection, but consumers will be better off with Reg BI than they were without it.

Though passed last week, the new regulations become effective on June 30, 2020.




Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey.   He welcomes questions you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to