New Best Interest Standard Discussed by SEC

Michael Volpe

After spending a decade in finance, Michael Volpe has been a freelance investigative journalist since 2009. His work has been published locally in the Chicago Reader, Chicago Crusader, Chicago Heights Patch, and New City. Nationally, Volpe's work has appeared in a wide variety of publications including the Washington Examiner, the Daily Caller, Crime Magazine, the Southern Christian Leadership Conference Newsletter, and Counter Punch. Volpe has been recognized by whistleblowers as leading the charge in getting their stories out. His first book Prosecutors Gone Wild was published in October 2012, his second book The Definitive Dossier of PTSD in Whistleblowers was published in February 2013 and his third book Bullied to Death was published in August 2015.

FINRA

New Best Interest Standard Discussed

October 18, 2019

Regulation Best Interest is the new SEC rule designed to make sure that brokers act in their client’s best interest, but this rule is 1,363 pages.

FINRA, the Financial Industry Regulatory Authority’s, Chief Legal Officer Bob Colby was the latest guest on FINRA’s podcast, Unscripted.

Colby discussed the new regulation, while noting that despite its length, the best interest standard was far from clear.

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“It’s (best interest) not specifically defined and that is one of the questions that have come up, but the standard is the overarching obligation to act in your customer’s best interest and not in your best interest.”

Colby said that the rule sets four major obligations

  • Disclosure- firms need to disclose any conflicts in recommendations
  • Care- “a delineation of what care you need to take in your dealings with customers,” he said.
  • Mitigation and control of conflicts
  • Compliance- firms need to have standards of processes in place for compliance

“The goal is designed to ensure that broker/dealers when they are dealing with their customers are doing so in a way that doesn’t put their interests in the way of their customers.”

In the US, professionals who provide investment advice are split into two general categories, investment advisors and broker/dealers.

The SEC recently put together its own video series to describe the difference and that can be found here.

Investment advisors are already guided by their own principle, the fiduciary standard, which the SEC defines similarly as, “required to act in the best interest of their clients and not place their own interests ahead of their clients.”

Colby explained that prior to the SEC’s best interest standards, broker/dealers were governed by FINRA’s suitability standard which he said, “required that the broker understand the context and goals of their customer and that their recommendations of securities that they make to the customers be ones that are suitable to those goals.”

He said that the new best interest regulation will largely replace FINRA’s suitability standard, but also noted that the best interest standard, “is closely aligned with FINRA concepts that have been developed in the FINRA suitability standard.”

To go along with this new standard is a form CRS, or Customer Relationship Standard.

“The form CRS was meant to be a short two page, or your operating to capacity, a four page statement, that you would get (at) the start of your relationship with the firm, that you could compare one firm to another, that’s supposed to make clear what’s the capacity the firm is operating in when dealing with you, what conflicts they face, what fees they charge,” Colby said.

FINRA was formed in 2007 when the regulatory arms of the NYSE and NASD merged.

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