Broker-dealers must conform practices to Regulation Best Interest

On Behalf of | Jul 3, 2020 | Fraud

New York broker-dealers must comply with the Securities and Exchange Commission’s Regulation Best Interest.

This regulation, which became effective June 30, 2020, obligates broker-dealers to put their customers’ best interests over their own financial or other interests. Broker-dealers and, in some cases, associated persons, have obligations covering disclosure, care, conflict of interest and compliance.

Disclosure obligation

Broker-dealers must make “full and fair” disclosure of all material facts relating to the scope and terms of the client relationship. They must also disclose all material facts relating to any conflicts of interest that may influence an investment recommendation. Disclosures must cover factors like material fees and costs, investment philosophy, account monitoring services and potential investment risks.

Care obligation

Broker-dealers must develop client recommendations using reasonable diligence, care and skill, and they must evaluate the potential risks, rewards and costs of each recommendation. They must consider each individual client’s investment profile and best interests.

Conflict of interest obligation

Broker-dealers must develop and enforce written policies reasonably designed to identify, disclose and eliminate conflicts of interest. The regulation requires broker-dealers to do away with sales contests or quotas, bonuses or non-cash compensation tied to the sale of certain securities within a specified period.

Compliance obligation

Broker-dealers must develop and enforce written policies designed to comply with this regulation. Policies should cover controls, correction of non-compliance, training and review.

Form CRS

The Financial Industry Regulatory Authority explains that Regulation Best Interest requires broker-dealers to deliver a Form CRS, client relationship summary, to their investor clients. This document must set out the scope of services, conflicts of interest, legal or disciplinary actions and fees and costs, together with numerous other SEC-mandated details.