Are the Regulation Best Interest and the BICE Related?
The SEC’s proposed Regulation Best Interest (Reg BI) is remarkable in its similarities to the DOL’s vacated Best Interest Contract Exemption (BICE) – or so Fred Reish thinks.
With a beginning note of caution that Reg BI applies to securities recommendations, while the BICE would have (but for the 5th Circuit’s rejection
of the fiduciary regulation “in toto”) covered any investment or insurance recommendation by a fiduciary advisor, Reish explains that Reg BI, if finalized, will require that broker-dealers and their representatives act in the “best interest” of “retail customers” (which he says includes IRA owners and participants). Similarly, in a recent blog post
Reish notes that the DOL’s BICE also would have required that fiduciary advisors (including broker-dealers and their representatives) act in the “best interest” of participants and IRA owners.
He also notes that Reg BI is similar to the BICE in that it covers recommendations to participants to take distributions from retirement plans and roll over to IRAs, though Reg BI only applies where securities recommendations are made. Reish writes that it appears to be the position of both the SEC and FINRA that a recommendation to take a distribution from a 401(k) plan implicitly includes a recommendation to liquidate the investments in the participant’s account – which would be a securities transaction.
Reish says that both Reg BI and the BICE include a duty of loyalty for recommended securities transactions, and that while the wording in the two pieces of guidance is slightly different, the outcome is the same: Broker-dealers and their representatives cannot prioritize their own interests ahead of the interests of investors.
‘Transactional Best Interest’
Reish takes issue with the notion that the SEC’s new standard of care is “suitability plus” or “enhanced suitability,” going on the explain that based on his reading of the guidance and on comments by SEC commissioners
, “the suitability standard is incorporated into the new Best Interest Standard of Care, rather than the other way around.” Instead he suggests it might be better referred to as “transactional best interest.”
And while Reish acknowledges that the SEC proposal does not fully define the Best Interest Standard of Care, he writes that it does say that broker-dealers and their representatives have to act with “diligence, care, skill, and prudence” – a reference that was also contained in the DOL’s Best Interest Standard of Care. Moreover, he notes that the proposed Reg BI goes on to say that its duty of care is based on the principles in the DOL’s Best Interest Standard of Care – and Reish says that suggests that a starting point for understanding the Reg BI requirements is to look at the DOL’s Best Interest Standard of Care.
Reish goes on to state that a close reading of that divides into three categories: a prudent person rule, a know-your-customer requirement, and a duty of loyalty – and that the preamble to the proposed Reg BI discusses those three principles as being key elements of its standards.
That said, Reish closes by explaining that while the proposal would require best interest for recommendations of securities transactions, it would not mandate a duty to monitor – and that is “significantly different from the role of an investment adviser (RIA), where best interest monitoring is generally expected.”