The Securities and Exchange Commission has been widely criticized for failing to define theterm “best interest” when it proposed,and eventually passed, its RegulationBest Interest for brokers.
Since the rule took effect on June30 — and the enforcement hammerlooms — industry officials’ efforts todecipher exactly what “best interest”means have escalated.
To help broker-dealers and advisorscomply with the newly effective RegBI — as well as the customer relationship summary, or Form CRS — theagency has released frequently askedquestions guidance, and did so againat this writing in mid-October onForm CRS.
After Reg BI was passed last June,
SEC Chairman Jay Clayton attempted
to explain the difference between Reg
BI and fiduciary duty:
There are all types of “fiduciary”
duties, he said, but he zeroed in on an
investment advisor’s fiduciary duty. “It’s
a combination of care and loyalty. You
owe somebody a duty of care, and you
can’t put your interests ahead of their
interests,” Clayton said.
“Best interest on the broker side hasmany of the same elements, but we wantpeople to understand that the investment advisor space, and the broker-dealer space, are different,” he continued.
But the industry remains unclear as toexactly what “best interest” means.
Ron Rhoades, director of the personal
financial planning program and assis-
tant professor of finance in the Gordon
Ford College of Business at Western
Kentucky University, who was recently
awarded the Tamar Frankel Fiduciary
prize by the Institute for the Fiduciary
Standard, told me during a recent
Human Capital podcast that eventu-
ally the SEC or the Financial Industry
Regulatory Authority — the enforcer of
Reg BI — is going to have to explain it.
“FINRA has indicated that it’s going
to interpret Reg BI, and I’m very cau-
tiously pessimistic about their inter-
pretation of that,” Rhoades said. “If
Reg BI is nothing more than suitabil-
ity plus a few more disclosures, and
we know that disclosures really don’t
work; investors don’t read them, and
even the few that do read them don’t
really understand them … then basically
we just have suitability standard plus a
little bit of disclosure.”
With Reg BI, Rhoades said, the SEC
“is taking this phrase ‘best interest,’
which has an established legal meaning,
and is redefining the English language.
The question is: how are they going to
Rhoades maintained that there’s still
“a lot that we don’t know about Reg BI,”
including “how the term ‘best interest’ is
going to be interpreted. We don’t know
how the duty of care in Reg BI is going
to be interpreted.”
Further, the name of Reg BI is “inher-
ently misleading,” Rhoades argued.
“The term best interest has beenused for centuries to describe acting foranother in their best interest. It’s basically equivalent to the fiduciary duty ofloyalty. Even here in the U.S., they haveover 900 judicial decisions that use theterm [that way]….
“Now we’re going to have brokerswho don’t have a fiduciary duty of loyalty under Reg BI — the SEC is clear,this is not a fiduciary standard — they’re
THE PLAYING FIELD
By Melanie Waddell
Deciphering ‘Best Interest’ in Reg BI
Industry officials of all stripes continue to scratch their heads about the
term as they attempt to comply.
Since the rule took
effect on June 30 —
and the enforcement
hammer looms —
efforts to decipher
exactly what “best