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Thompson Hine LLP, a full-service business law firm with approximately 400 lawyers in 8 offices, was ranked number 1 in the category “Most innovative North American law firms: New working models” by The Financial Times and was 1 of 7 firms shortlisted for The American Lawyer’s inaugural Legal Services Innovation Award. The firm has been recognized by the National Law Journal as a Legal Technology Trailblazer and featured by Bloomberg for its innovative service delivery models, which drive accuracy and predictability. The firm’s commitment to innovation is embodied in Thompson Hine SmartPaTHTM – a smarter way to work – predictable, efficient and aligned with client goals. For more information, please visit ThompsonHine.com and ThompsonHine.com/SmartPaTH.

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The Securities and Exchange Commission (SEC) recently adopted Regulation Best Interest, which requires broker-dealers to put their retail customers’ best interests ahead of their own financial interests when making investment recommendations. The SEC also took action requiring broker-dealers and investment advisers to provide simple, plain-English disclosures about the nature of their customer relationships. It further clarified investment advisers’ fiduciary duties and the definition of broker-dealers under the Investment Advisers Act of 1940 (Act). Collectively, these measures are intended to enhance the standard of conduct that financial professionals owe their customers. Broker-dealers must comply with Regulation Best Interest by June 30, 2020.

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The SEC intends Regulation Best Interest to be an improvement on the current “suitability standard” that only holds broker-dealers accountable for selling investments they believe are suitable for their clients, regardless of whether the investments are actually in their clients’ best interests. Regulation Best Interest requires a broker-dealer to comply with four specific obligations:

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The SEC also adopted the new Form CRS Relationship Summary to provide retail investors with short and accessible disclosures that will allow them to compare investment advisers and broker-dealers. Form CRS requires a firm to disclose and explain the types of clients it services, the costs and conflicts of interest associated with those relationships, the firm’s legal or disciplinary history, and how to obtain additional information about the firm. These disclosures must be presented in plain English.

In addition, the SEC affirmed and clarified the fiduciary duties investment advisers owe clients under the Act and issued a new interpretation delineating where a broker-dealer’s performance of advisory activities causes it to become an investment adviser. The new interpretation defines when a broker-dealer is exempt from registering as an investment adviser because the advisory services provided are “solely incidental” to its business as a broker-dealer and such incidental advisory services are provided for no special compensation. The guidance illustrates the exception in the context of exercising investment discretion over customer accounts and account monitoring.<a title="" href="#_edn1" name="_ednref1">[1]</a>

The guidance states that “a broker-dealer’s provision of advice as to the value and characteristics of securities or as to the advisability of transacting in securities is consistent with the solely incidental prong if the advice is provided in connection with and is reasonably related to the broker-dealer’s primary business of effecting securities transactions.” Therefore, if a broker-dealer’s primary business is giving advice, or if the advisory services are not offered in connection with or are not reasonably related to the broker-dealer’s business of effecting securities transactions, the broker-dealer’s advisory services are not solely incidental to its business as a broker-dealer. In determining whether the exception applies, broker-dealers must consider all “facts and circumstances surrounding the broker-dealer’s business, the specific services offered, and the relationship between the broker-dealer and the customer.” The SEC further highlighted the fact that “[a]dvice need not be trivial, inconsequential, or infrequent to be consistent with the solely incidental prong.”

While supporters of Regulation Best Interest and these measures believe they are an improvement over the current standard for broker-dealers, critics contend they do not go far enough to protect customers. They note the potential for confusion because Regulation Best Interest does not define “best interest.” While state regulators could implement stricter standards, the SEC chairman warned against creating a regulatory patchwork that would make enforcement of these measures more difficult and expensive.

Cassandra W. Borchers 513.352.6632 <a href="mailto:Cassandra.Borchers@ThompsonHine.com">Cassandra.Borchers@ThompsonHine.com</a>

Philip B. Sineneng 614.469.3217 <a href="mailto:Philip.Sineneng@ThompsonHine.com">Philip.Sineneng@ThompsonHine.com</a>

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

This document may be considered attorney advertising in some jurisdictions.

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SEC Adopts Regulation Best Interest and Other Measures for Broker-Dealers and Investment Advisers

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