Recently, firm founder and securities fraud lawyer Jake Zamansky published an article discussing the U.S. Securities and Exchange Commission’s (SEC) new Regulation “Best Interest” (Reg BI), which went into effect on June 30, 2020. The implementation of Reg BI is an important development for individual investors, as it establishes a fiduciary duty that requires brokers to act in their clients’ best interests.
The SEC has published a comprehensive guide to Reg BI, as well as an extensive list of frequently asked questions (FAQs). Here are some of the key points for individual investors:
1. Reg BI Applies to Investment “Recommendations”
Under Reg BI, brokers have an obligation to act in their clients’ best interests when providing investment “recommendations.” The SEC states that “recommendation” does not have a “bright-line definition,” but instead Reg BI’s applicability must be determined based on an assessment of all pertinent factors. According to the SEC:
“Factors considered in determining whether a recommendation has taken place include whether the communication ‘reasonably could be viewed as a ‘call to action’’ and ‘reasonably would influence an investor to trade a particular security or group of securities.’ The more individually tailored the communication to a specific customer or targeted group of customers about a security or group of securities, the greater the likelihood that the communication may be viewed as a ‘recommendation.’”
2. Brokers Must Disclose All Material Facts Pertaining to the Relationship and Any Conflicts of Interest
When providing investment recommendations, brokers now have an obligation to disclose all material facts, “relating to the scope and terms of the relationship,” with the investor, as well as all material facts, “relating to conflicts of interest that are associated with the recommendation.” This includes facts such as:
- All fees and costs that apply;
- Any limitations on the strategy that the broker is recommending;
- Whether the broker will monitor the investor’s account;
- The “general basis” for the recommendation; and,
- All risks associated with the recommendation (which must be disclosed in “standardized terms”).
3. Brokers Must Make All Required Disclosures in Writing
In order to comply with Reg BI, brokers must make all of their required disclosures in writing. However, they may provide certain “supplemental” disclosures orally. Supplemental disclosures are limited to those that are not necessary in order to satisfy brokers’ initial disclosure requirements.
4. Brokers Must Exercise “Reasonable Diligence, Care, and Skill”
In addition to the new disclosure requirements, Reg BI also requires brokers to exercise, “reasonable diligence, care, and skill when making a recommendation.” In order to satisfy this obligation, brokers must:
- Understand the associated risks, rewards and costs, and, “have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers;”
- Have a reasonable basis to believe that the recommendation is in the specific customer’s best interests based on his or her investment profile; and,
- Have a reasonable basis to believe that any recommended series of transactions is in the specific customer’s best interests, “when taken together in light of the retail customer’s investment profile.”
5. Brokers Must Consider “Reasonably Available Alternatives”
In order to make recommendations based on “reasonable diligence, care, and skill,” Reg BI requires brokers to consider “reasonably available alternatives if any,” to the recommended investment opportunity or strategy. In other words, brokers cannot make recommendations in a vacuum, but must instead conduct research in order to determine whether other investments would better serve the specific customer’s investment objectives.
Speak with a Securities Fraud Lawyer at Zamansky LLC
Zamansky LLC is a securities fraud law firm that represents individual investors nationwide in arbitration and litigation against their brokers and advisors. If you have questions about your rights under Reg BI and would like to speak with an attorney, call 212-742-1414 or contact us online for a free consultation.