August 25, 2020

By: Robert "Bob" Boeche, II, Partner

On June 30, 2020, the Securities and Exchange Commission’s (“SEC’s”) Regulation Best Interest (“Reg BI”) became effective.  While it’s often referred to singularly, Reg BI shouldn’t be read as just one rule.  Rather, Reg BI is part of a package of rules and interpretations that the SEC adopted in an effort to “enhance the quality and transparency of retail investors’ relationship with investment advisers and broker-dealers.”[1]  This package includes: (i) Regulation Best Interest – which sets a new standard of conduct for brokers, (ii) Form CRS Relationship Summary – which requires certain disclosure and delivery obligations for brokers and registered advisers,[2] and (iii) two separate interpretations[3] under the Investment Advisers Act of 1940 which, among other things establishes certain standards of conduct for investment advisers.[4] 

Efforts to clarify duties owed clients and promote additional transparency is not ending with Reg BI, however.  Since the SEC’s adoption in 2019, additional rules have been proposed that seek to enable “regulatory efficiencies,” or promote the best-interest standard obligations for those advisers not subject to SEC oversight. 

1.       Department of Labor’s Proposed Rule

As most industry professionals will recall, in 2016 the Department of Labor (“DOL”) previously sought to implement its “Conflict of Interest” fiduciary rule package[5] that would have, among other things, provided new definitions for who is a “fiduciary” and require contractual obligations concerning prohibited transactions and conflicts of interest.  However, this rule fell into uncertainty following a presidential memorandum staying its implementation date, and a 2018 federal appeals court overturning the rule.

Following the adoption of Reg BI, the DOL issued a complimentary proposal[6] under federal retirement law – the Employee Retirement Income Security Act (“ERISA”) that seeks to resolve uncertainty surrounding its prior “Conflict of Interest” rule and promote “regulatory efficiencies” with the SEC’s Reg BI standard.  Under current rules, fiduciaries are generally prohibited from accepting payments that pose a conflict of interest, however, the proposed rule allows financial professionals to accept payments, like commissions, when providing advice to retirement accounts, provided they meet certain “best-interest” standards, including: earning reasonable compensation, not making misleading statements and telling customers they are acting as fiduciaries.[7]

The DOL also reinstated its “five-part test” for determining whether a person is a “fiduciary” by reason of providing investment advice for a fee.  This became effectively immediately and is a return to language previously relied upon by industry professionals prior to the DOL’s passage of the “Conflict of Interest” rule.

2.       State Regulations and NASAA Proposed Model Rule

Reg BI is now law and enforceable upon all SEC registrants.  But what about those firms registered at the state-level?  These firms are not necessarily bound by Reg BI, and instead must follow the rules promulgated by the respective state(s) in which such firms are registered. 

Recently, the North American Association of Securities Administrators (“NASAA”) proposed a new “Policies and Procedures” model rule[8] that would require “investment advisers to establish, maintain, and enforce written policies and procedures tailored to the investment adviser’s business model” and generally bring their policies, procedures and disclosures in line with the SEC’s standards by addressing “compliance, supervision, proxy voting, physical and cyber security, a code of ethics (including holdings and transaction reports), handling of material non-public information, and business continuity and succession plans.” 

The proposed rules would require firms in multiple states to have policies and procedures that are customized to each state’s requirements, with a code of ethics that aligns closely with SEC Rule 204A-1, to “enhance investment advisers’ abilities to fulfill their fiduciary duties to clients.”  NASAA stated that the proposed rule would not allow for reliance upon “template” manuals, but rather requires customization of policies and procedures thus creating an “enhanced culture of investment adviser regulatory compliance…to protect the investing public.”


Those brokerage and advisory firms registered with the SEC should already have implemented policies and procedures designed to track the requirements of the SEC’s new rules – including the creation, filing and distribution of Form CRS Relationship Summary disclosure.  State registrants, as well as firms who service retirement account clients, should be tracking the new proposed rules and preparing to update their firm’s policies accordingly.  If you have not already performed such tasks, Shustak Reynolds & Partners is here to help.  We focus our practice on securities and financial services law and complex business and financial disputes.  We represent many broker-dealers, registered representatives, investment advisors, investors, and businesses.  Please contact us by visiting our website at or by calling (619) 696-9500.

[4] Specifically, a duty to provide advice that is in the best interest of the client, a duty to seek best execution, a duty to provide advice and monitoring over the course of the client relationship, and clarification of duty of loyalty. 

[5] See Department of Labor Conflict of Interest Rule, 29 CFR Parts 2509, 2510 & 2550, April 8, 2016

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