U.S. SEC issues guidance on broker and adviser ‘care obligations’

FILE PHOTO: The seal of the U.S. Securities and Exchange Commission (SEC) is seen at their headquarters in Washington, D.C., U.S., May 12, 2021. Picture taken May 12, 2021. REUTERS/Andrew Kelly

By John McCrank

(Reuters) – The U.S. Securities and Exchange Commission (SEC) published a staff bulletin on Thursday giving guidance on how broker dealers and investment advisers must put their clients’ interests ahead of their own when providing advice and recommendations to retail investors.

The guidance, which is the third in a series of such documents, specifically clarifies brokers’ and advisers’ so-called “care obligations” under the SEC’s long-standing investment adviser fiduciary standard and its Regulation Best Interest rule (Reg BI), passed in 2019.

While staff guidance cannot be the basis for an SEC enforcement action, an increasing amount of the regulator’s recent enforcement actions against advisers have focused on care obligations, so the information may be helpful, an SEC official told reporters in a background briefing.

The care obligations have three general categories: understanding the potential risks, rewards and costs associated with investments and strategies; understanding the retail investor who will be receiving the recommendations or advice; and based on that knowledge and a consideration of reasonably available alternatives, what investments or strategies are in the best interest of the investor.

Reg BI is a package of rules requiring brokers to disclose potential conflicts in the fees investors pay and the commissions brokers earn when giving financial advice. The rules also require brokers to raise the standard for giving advice to meet a client’s best interest when recommending stocks, mutual funds and other financial products.

The Republican-led SEC finalized Reg BI in 2019 in what was widely seen as a win for Wall Street after its 10-year battle over regulation of the investment advice industry, having fought off a more stringent proposal by the Department of Labor.

Consumer groups criticized the Reg BI rule for being too vague in its definition of “best interest” while not addressing all potential conflicts.

The guidance under the current Democratic-led SEC, seeks to plug some of these gaps, analysts have said.


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