The Securities Litigation Expert Blog

Comparing SEC Regulation Best Interest to Existing FINRA Rules

Posted by Jack Duval

Apr 27, 2018 9:30:35 AM


SEC Regulation Best Interest - Commissioner Kara Stein

AGENCE FRANCE-PRESSE/GETTY IMAGES US Securities and Exchange Commissioner Kara Stein.

This blog post continues a series exploring the fiduciary rules proposed by the DOL and now the SEC.  The DOL Rule posts can be found here and the SEC Rule post can be found here.

The SEC's proposed Regulation Best Interest ("RBI") is remarkable in how poorly it is crafted.  Indeed, it is a disaster.

If passed in it's current form, RBI will:

  • Not create a unified fiduciary standard as it was supposed to under the Dodd-Frank Act Section 913;
  • Confuse clients as to the duties of broker-dealers compared to investment advisors, and;
  • Pass off existing FINRA Rules and interpretations as some kind of heightened standard.

Table 1:  Comparing SEC Regulation Best Interest to Existing FINRA Rules

SEC Regulation Best Interest v. Existing FINRA Rules

For a PDF of this table click here.

As can be seen above, the only thing RBI adds are the disclosures relating to the scope and terms of the relationship and material conflicts of interest.  While these are good additions, they fall far short of increasing investor protections.

Everything else in RBI already exists within the FINRA rules.

Kara M. Stein Comments

SEC Commissioner Kara M. Stein has savaged RBI in her public statement:

... does this proposal require financial professionals to put their customers' interest first, and fully and fairly disclose any conflicting interests? No.  Does this proposal require all financial professionals who make investment recommendations related to retail customers to do so as fiduciaries? No.  Does this proposal require financial professionals to provide retail customers with the best available options? No.

Commissioner Stein also points out, as have others, that nowhere in the 1,000+ pages of related documents does RBI define what "best interest" means.  Instead, the RBI states the best interest obligation will be satisfied "if the broker-dealer complies with four component requirements: a Disclosure Obligation, a Care Obligation,and two Conflict of Interest Obligations."  (96)

Thus, broker-dealers will be able to check the boxes to prove that they complied with an undefined "best interest" obligation that already exists under FINRA rules.  This can only weaken investor protection.

To learn more about fiduciary expert Jack Duval, click here.


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Topics: FINRA Rule 2111 (Suitability), Investment Suitability, Suitability Expert, fiduciary obligations, erisa fiduciary expert, Securities Exchange Commission, Regulation Best Interest, fiduciary expert

SEC Regulation Best Interest

Posted by Jack Duval

Apr 20, 2018 8:18:52 AM

Accelerant SEC Regulation Best Interest - Logo 


This blog post continues a series exploring the fiduciary rules proposed by the DOL and now the SEC.  My previous blog posts can be found here.

On Wednesday, April 18, 2018, the SEC issued a number of rule proposals designed, in theory, to "unify" the obligations of registered representatives of broker dealers with those of registered investment advisors.

It does no such thing.

Broker-dealers and their registered representatives will not be fiduciaries under Regulation Best Interest.  Investment advisors will remain fiduciaries.

Essentially, Regulation Best Interest will take many of the obligations that already exist in the FINRA Rules and Regulatory Notices and bring them under the SEC's aegis.  Indeed, the SEC stated:

As discussed herein, some of the enhancements that Regulation Best Interest would make to existing suitability obligations under the federal securities laws, such as the collection of information requirement related to a customer's investment profile, the inability to disclose away a broker-dealer's suitability obligation, and a requirement to make recommendations that are "consistent with his customers' best interest," reflect obligations that already exist under the FINRA suitability rule or have been articulated in related FINRA interpretations and case law.  (Emphasis added.  Regulation Best Interest; 10)

This means the suitability standard will remain for registered representatives with some additional language about the "best interests" of the client.  I will try to define exactly what the additional "best interest" language actually means in subsequent posts.

The SEC has released approximately 1,000 pages relating to this proposal.  You can find the three related releases here:

Release No. 34-83062; Regulation Best Interest;

Release No. IA-4889; Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for Comment on Enhancing Investment Adviser Regulation;

Release No. 34-83063; form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the use of Certain Names or Titles.

To learn more about fiduciary expert Jack Duval, click here.


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Topics: FINRA Rule 2111 (Suitability), Investment Suitability, Suitability Expert, fiduciary obligations, Securities Exchange Commission, Regulation Best Interest

Specialist Suitability Obligations - Working with a Specialist

Posted by Jack Duval

Dec 7, 2013 9:21:00 AM

This blog post continues our expert analysis of broker-dealer specialists and specialist suitability obligations when interacting with clients.

Suitability Obligations of Specialists

Suitability can be described simply as matching an investment or strategy to the individual investors’ particular facts and circumstances. In order to accomplish this, the representative must know both the client and the investment.

The suitability obligation is clearly spelled out in FINRA Suitability Rule 2111, which contains both customer-specific and reasonable-basis components.[1] FINRA Rule 2111 states, in part:

(a)   A member or an associated person must have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer's investment profile. A customer's investment profile includes, but is not limited to, the customer's age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose to the member or associated person in connection with such recommendation.[2]

The customer-specific suitability part of the rule is satisfied by the representative, and involves the suitability of recommendations as they relate to a specific customer’s unique facts and circumstances. The reasonable-basis suitability part of the rule is fulfilled first by the member firm and then by the representative. Initially, this determination involves a due diligence investigation by the member firm into the investment to determine if it should be offered to any of their clients.[3]

The specialist can play an important role in the reasonable-basis due diligence process. They should have deep industry knowledge within their specialty and could help their firm vet a new product. More frequently, the specialist helps the representative with her due diligence process by determining if a product is suitable for a particular client.

Specialist-Client Interactions

A potential problem arises when the representative, who knows the client, and the specialist, who knows the product or strategy, come together to make a recommendation to the client. The representative and specialist can both be assumed to know (respectively) the client and the product, but what if neither knows both? In such an instance, can a suitable recommendation be made?

Very simply, the answer is no. We examine this question from the perspectives of both the representative and specialist in our next blog post.

Specialist suitability expert John Duval, Sr. and CEO Jack Duval have written a white paper on specialist suitability obligations.  It can be accessed here.


[1]          These obligations existed under FINRA Rule 2310 (Recommendations to Customers) and various Regulatory Notices before FINRA Rule 2111. For more detailed analysis see Accelerant Whitepaper: Leveraged and Inverse ETFs: Trojan Horses for Long-Term Investors.

[2]          FINRA Rule 2111. This rule replaced Rule 2310 (Customer Recommendations) and is effective from July 9, 2012.

[3]          Id. at Supplementary Material .05 Components of Suitability Obligations.



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Topics: broker-dealer specialist system, specialists suitability, FINRA Rule 2111 (Suitability)

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