Investor Protection Clinic - Student Blog

States’ Proposed Regulations Catch SEC’s Reg BI Shortcomings

On June 5, 2019, the Securities and Exchange Commission (SEC) adopted Regulation Best Interest (Reg BI). Reg BI establishes a best interest standard of conduct for broker-dealers when making recommendations to a retail customer. The SEC’s regulation requires broker-dealers to only recommend financial products to their customers that are in the customers best interests and to identify any potential conflicts of interests and financial incentives the broker-dealer may have with these products. In short, Reg BI attempts to improve safeguards for investors and standardize conduct.


As good as “best interest” sounds, is it really protecting consumers? No. Rather than defining “best interest,” the SEC created a checklist of four obligations a firm must discharge to meet the standard: (1) a broker-dealer must disclose material facts about the recommendation and services provided; (2) a broker-dealer must exercise reasonable diligence, care, and skill when making a recommendation and the broker-dealer must understand potential risks, rewards, and costs associated with the recommendation; (3) a broker-dealer must establish, maintain, and enforce written policies and procedures designed to identify and – at a minimum – disclose or eliminate conflicts of interests. Conveniently enough, none of these actually obligate a firm to place a customer’s interests ahead of the firms.  Reg BI may not protect investors. As John Stein, founder and CEO of Betterment, states “Unfortunately, misleadingly titled rule may best serve the marketing interests of large financial corporations to the detriment of individual investors. It is a gift of sheep’s clothing to the wolves of Wall Street.”


In response, some states (Nevada, New Jersey, and Massachusetts) have taken notice and aim to impose a fiduciary duty on broker-dealers and their agents. A fiduciary duty is legal term describing the relationship between two parties that obligates one (here, the broker-dealer) to act solely in the interests of the other (here, the investor). New Jersey’s proposed regulations require that broker-dealers, investment advisers, and agents be subject to a fiduciary duty when recommending an investment strategy, or the purchase, sale or exchange of any security. Similarly, Nevada’s proposed regulation require broker-agents and those who hold themselves out as advisors to accept ongoing fiduciary duties to clients. Most recently, Massachusetts proposed a state fiduciary rule. The proposal requires that financial recommendations and advice be in the best interest of customers and clients, without regard to the interests of the broker-dealer, advisory firm and its personnel.

More about Whitney Jones
  • The Alarming Rate of FINRA Expungements

    Dec. 12, 2019 -
    To address potentially inaccurate information within the Central Registration Depository (CRD), the Financial Industry Regulatory Authority’s (FINRA) Rule 2080 allows brokers to challenge and sometimes remove customer dispute information from...