REGULATORY UPDATE
Regulation Best Interest —
Serving as a fiduciary
Always follow
all compliance
instructions, and
always put your
clients’ interests
above all others.
Judi Carsrud is Assistant Vice President,
NAIFA Government Relations
Department. Contact her at
[email protected]
Although insurance and investments are already well-regulated industries, recent years have
seen a lot of activity from the Securities and Exchange Commission (SEC) and the Department
of Labor (DOL) to establish standards of conduct.
Regulation Best Interest
The SEC finalized Regulation Best Interest (Reg BI), with full enforcement effective June
30, 2020. That ruling requires that broker-dealers act in the best interest of a retail customer
when making a recommendation of any securities transaction or investment strategy involving
securities to a retail customer.
Regulation Best Interest enhances the broker-dealer standard of conduct beyond existing
suitability obligations and makes it clear that a broker-dealer may not put its financial interests
ahead of the interests of a retail customer when making recommendations.
The SEC did not define specifically “best interest” or impose a fiduciary duty on brokerdealers
and their registered representatives. The ruling includes a series of obligations to the
client, which demonstrate what it means to “act in the client’s best interest.” These obligations
include disclosures, a duty of care, mitigation/elimination/disclosure of conflicts of interest
and compliance via written policies and procedures.
The DOL rule
The DOL issued a final rule on April 8, 2016, that re-defined who an investment advice
fiduciary is when working with retirement plans, such as 401(k) plans and IRAs.
The Impartial Conduct Standards and the new definition of “investment advice fiduciary”
became effective on June 9, 2017, with the remainder of the rule delayed until July 2019.
This rule, in addition to making almost all activity subject to fiduciary duty, included a new
exemption, the Best Interest Contract (BIC) exemption, which most in the industry found
completely unworkable, along with the expanded definition of “investment advice fiduciary.”
This would have left most account holders without access to personalized financial assistance.
Then, on March 15 th , 2018, the Fifth Circuit Court of Appeals ruled in favor of NAIFA and
other litigants, vacating the DOL fiduciary rule. As a result of the vacatur, on June 29, 2020, the
DOL issued a final rule that reinstates the 5-part test to define investment advice fiduciaries,
and returns PTE 84–24 to its prior form.
Additionally, the DOL has proposed an exemption to allow investment advice fiduciaries to
receive compensation, including advice to roll over assets from a Plan to an IRA, which would
otherwise violate the prohibited transaction provisions of ERISA and the Code.
The DOL exemption imposes an Impartial Conduct Standard, which states that:
Advice must be in the best interest of the retirement investor.
Investment advice fiduciaries may charge only reasonable compensation.
They should not make misleading statements.
They are required to disclose their fiduciary status, the service to be provided, and any
material conflicts.
If you are a fiduciary, you must know what is required of you. Always follow all compliance
instructions from your broker-dealer and other financial institutions, and always put your
clients’ interests above all others.
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