SEC Division of Trading and Markets Director Brett Redfearn defended key aspects of the proposed Regulation Best Interest. He encouraged market participants to provide data and comments on how the proposed standards may impact industry practices regarding investment advice from broker-dealers.
In remarks at the FINRA Annual Conference, Mr. Redfearn stated that the SEC developed Regulation Best Interest with the goal of improving the quality of advice given by broker-dealers to clients while also "preserving the 'pay as you go' model" as an option for investors. In discussing the process for developing the Regulation, Mr. Redfearn acknowledged the difficulties of determining an appropriate "calibration" that works to mitigate conflicts without adversely impacting cost and availability of advice. To do so, he said, required consideration of how a best interest standard would interact with a wide range of products, services and types of advice.
Mr. Redfearn explained that Regulation Best Interest was developed in a manner consistent with existing best interest principles (such as the Advisers Act fiduciary duty and the DOL fiduciary rule), but was tailored to ensure it appropriately applies to the relationship between broker-dealers and investors. He addressed concerns that the SEC chose not to define the term "best interest," arguing that the principles-based guidelines adequately outline a "facts and circumstances" approach that can be used to ascertain whether broker-dealers are acting in their customers' best interests on a case-by-case basis.
Mr. Redfearn detailed the three major broker-dealer obligations under Regulation Best Interest: disclosure, reasonable care and addressing conflicts of interest. He identified the conflicts obligation as "probably the biggest change," and explained that broker-dealers would be explicitly required to implement and enforce policies and procedures to identify and address, rather than merely disclose, material conflicts of interest. Mr. Redfearn asserted that the SEC intends to allow broker-dealers to implement their own conflict mitigation measures in accordance with their individual business models.
Mr. Redfearn asked that firms provide the SEC with feedback on all aspects of Regulation Best Interest, particularly with regard to how new obligations may impact existing business practices and compliance procedures.
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