US SEC issues guidance on broker and adviser 'care obligations'
Although staff recommendations cannot serve as the foundation for an SEC enforcement action, care requirements have been a growing part of the regulator's recent enforcement actions against advisors
The seal of the US Securities and Exchange Commission (SEC) is seen at their headquarters in Washington, DC. Reuters File
In advising and recommending investments to retail investors, broker-dealers and investment advisors must put the interests of their customers before their own, according to a staff bulletin released by the US Securities and Exchange Commission (SEC) on Thursday.
The third in a series of similar materials, the advice explicitly explains the so-called “care obligations” of brokers and advisors under the SEC’s long-standing investment adviser fiduciary standard and its Regulation Best Interest regulation (Reg BI), which was approved in 2019.
Although staff recommendations cannot serve as the foundation for an SEC enforcement action, care requirements have been a growing part of the regulator’s recent enforcement actions against advisors, so the knowledge may be useful, an SEC official told reporters in a background briefing.
The care obligations have three general categories: understanding the potential risks, rewards and costs associated with investments and strategies; understanding the retail investor who will be receiving the recommendations or advice; and based on that knowledge and consideration of reasonably available alternatives, what investments or strategies are in the best interest of the investor.
Reg BI is a package of rules requiring brokers to disclose potential conflicts in the fees investors pay and the commissions brokers earn when giving financial advice. The rules also require brokers to raise the standard for giving advice to meet a client’s best interest when recommending stocks, mutual funds and other financial products.
The Republican-led SEC finalized Reg BI in 2019 in what was widely seen as a win for Wall Street after its 10-year battle over regulation of the investment advice industry, having fought off a more stringent proposal by the Department of Labor.
Consumer groups criticized the Reg BI rule for being too vague in its definition of “best interest” while not addressing all potential conflicts.
The guidance under the current Democratic-led SEC seeks to plug some of these gaps, analysts have said.
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