Are you familiar with the Security and Exchange Commission’s Regulation Best Interest? Introduced by the SEC in 2019, it was meant to enhance and raise the bar for the standard of conduct for broker-dealers when recommending securities transactions or investment strategies to retail customers. It has had a significant impact, imposing an almost fiduciary-like duty on broker-dealers to make them act in the best interest of their clients and to exercise reasonable care and prudence in making recommendations. It also requires them to maintain a policy to disclose or mitigate conflicts of interest and to implement written policies and procedures to ensure that they comply with the regulation.

The regulation does not impose a full fiduciary duty on broker-dealers:  it does not forbid a conflict of interest, but it does make them prioritize the client’s interests and get consent regarding any conflict that exists. It also does not create a new private right of action for determining whether a broker-dealer has violated the rule. Rather, it allows clients to pursue violations through existing standards such as arbitration through the Financial Industry Regulatory Authority (FINRA) and pursuing claims for breach of contract, fraud, or breach of duty by reporting violations to the SEC, which can use the regulation as a standard of enforcement. Clients cannot take direct legal action based solely on the Best Interests regulation: Only the SEC can initiate investigations, bring enforcement actions, and impose sanctions on those who violate the rule, though FINRA can also enforce compliance through disciplinary actions.

To prove a breach under the Best Interests regulation, the responsible agencies must prove that a recommendation was made to a retail customer that was not in their best interest, that the broker-dealer placed its interests ahead of the customers, or that there was a failure to disclose or mitigate conflicts of interest.

Proving a breach of the Best Interests regulation is challenging, as there is significant subjectivity to interpretation, and broker-dealers can argue that they adequately disclosed conflicts of interest and the nature of the transaction. The lack of a direct route to legal action is also severely limiting for those seeking a remedy, though arbitration may still be available.

If you believe that you’ve been harmed by a broker-dealer’s failure to adhere to the regulation’s rules, we can help. Contact us today for a comprehensive review of your situation and guidance on the best path forward.