Author
Partner, Disputes, Toronto
On June 5, 2019, after over a year of debate, the U.S. Securities Exchange Commission (“SEC”) adopted its long-awaited Regulation Best Interest: The Broker-Dealer Standard of Conduct (the “Best Interest Regulation”). This new rule establishes a standard of code of conduct for broker-dealers when they make recommendations to a retail customer regarding a securities transaction or investment strategy.
Last April, the SEC proposed amendments to the standards of conduct that applies to broker-dealers and investment advisers when advising their retail clients. Thousands of stakeholders in the U.S. financial sector commented on the proposal.
The new Best Interest Regulation provides that the new standard enhances the broker-dealer standard of conduct beyond existing suitability obligations and requires broker-dealers to act in the “best interest” of the retail customer, without putting its financial interest ahead of its clients. The regulation also requires broker-dealers to address conflicts of interest “by establishing, maintaining, and enforcing policies and procedures reasonably designed to identify and fully and fairly disclose material facts about conflicts of interest”, and to mitigate or eliminate the conflict in circumstances where disclosure is insufficient to address the conflict.
The SEC has also introduced a new rule which requires that broker-dealers and investment advisers provide a Client Relationship Summary to retail investors, which provides easy-to-understand information about the nature of their professional relationship. This is meant to highlight the key differences between broker-dealers and investment advisers and the services offered.
The date of implementation of the new regulation has not yet been announced.
Will Canadian regulators introduce a “best interest” standard?
As we previously discussed, the management of conflicts of interest in the financial industry has been an area of increased focus for Canadian regulators. In its 2018-19 statement of priorities, the Ontario Securities Commission expressed its plan to publish regulatory reforms that “address the best interests of the client” and “infuse best interest principles” in the fundamental obligations registrants owe their clients. On the other hand, most other provinces (aside from Ontario and New Brunswick) have abandoned considerations of a “best interest” standard at this time. It remains to be seen whether the SEC’s Best Interest Regulation will have any impact on the development of a similar regulatory standard in Canada.
Given the increased regulatory scrutiny on these issues, compliance officers, legal advisors and responsible executives in the financial industry need to be vigilant that they have effective processes in place to ensure that there is enterprise-wide identification monitoring and management of potential conflicts of interest and regulatory requirements.
