SEC Conflicts of Interest Standards

On Aug. 3, SEC guidance on Reg BI, IA fiduciary conflicts of interest.

  • SEC published Staff bulletin of questions/answers reiterating standards of conduct for broker-dealers and investment advisers in identifying, addressing conflicts of interest.
  • Follows SEC chair May 2022, remarks on digital advice client protection, see #138188.
  • Reg BI and Fiduciary Standard
  • Regulation Best Interest (Reg BI) for broker-dealers and the fiduciary standard for investment advisers (IA fiduciary standard), are drawn from key fiduciary principles.
  • Obligation act in investor's best interest, not own interests ahead of investor interest.
  • Under Reg BI and IA fiduciary standard, conflict of interest is interest that may incline the B/D or IA, to make recommendation or render advice that is not disinterested.
  • Identifying and addressing conflicts should not be merely a check-the-box exercise, but should be conducted as a robust, ongoing process that is tailored to each conflict.
  • Therefore, important that firms and their financial professionals review their business model and relationships with investors to address conflicts of interest specific to them.
  • Conflicts of Interest Standards
  • All broker-dealers, investment advisers, and financial professionals have at least some conflicts of interest with their retail investors
  • Have economic incentive to recommend products, services, account types that provide more revenue or other benefits for firm, even if not in best interest of retail investor.
  • Examples of common sources of conflicts of interest can include, but are not limited to, compensation, revenue or other benefits (financial or otherwise) to firm or affiliates.
  • Firm expected to identify conflicts of interest; under Reg BI, broker-dealers must establish, maintain and enforce written policies and procedures reasonably designed to identify all conflicts of interest associated with recommendations to retail customers.
  • Appropriate steps depend on firm’s specific business model; provided certain non-exhaustive steps to identify conflicts, consider including in policies and procedures.
  • Once identified all conflicts of interest, disclosure of conflicts alone will not satisfy the obligation to act in retail investor best interest; some conflicts address by mitigation.
  • Circumstances when particular conflict be eliminated; Reg BI explicitly requires policies to identify, eliminate any sales contests, sales quotas, bonuses, and non-cash compensation based on sales of specific securities/types within limited period of time.

Regulators FINRA; SEC
Entity Types B/D; CNSM; Fiduciary; IA; Inv Co
Reference Bul, 8/3/2022; Reg BI
Functions Client Money; Compliance; C-Suite; Legal; Sales Practices; Suitability; Trading
Countries United States of America
Products Fund Mgt; Securities; Wealth Mgt
Regions Am
Rule Type Guidance
Rule Date 8/3/2022
Effective Date 8/3/2022
Rule Id 144949
Linked to Rule :138188
Reg. Last Update 8/3/2022
Report Section US Investment

Last substantive update on 08/04/2022