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SEC's Best Interest Standard Causing Confusion Over Undefined Rules, Vague Language

The Securities Exchange Commission (SEC) has proposed a new best interest standard that requires brokers to act in the best interest of their clients, but the rule lacks clarity.

What is the Best Interest Standard?

Recently, a new “best interest standard” proposed by the SEC is creating confusion about broker-dealer rules related to an investor's best interest. The rule addresses the question of whether changes should be made to one of the standards of conduct that may apply to broker-dealers who make recommendations about securities to investors and retail clients. Due to the relationships between brokers and investors, the potential for conflicts of interest is high. Unethical brokers who seek to maximize personal profits sometimes sell products that are not in the client's best interest.

Since broker-dealers provide recommendations and advice on investments, they are subject to certain FINRA rules and regulations under the Exchange Act. While FINRA rules and regulations are extensive, there is no specific obligation under the Exchange Act that broker-dealers must make recommendations that are in their clients' best interest. The new SEC “best interest standard” seeks to make enhancements to current regulations and better clarify the “best interest obligation” for all broker-dealers. Of course, there are other standards of conduct under state statutory laws or common law that may apply in many circumstances.

FINRA is primarily responsible for holding broker-dealers to the appropriate standard of care and enforcing the securities laws and regulations. When violations occur, FINRA can issue steep fines and suspensions against firms and individuals and bar brokers from practicing within the securities industry.

Whatever the standard, brokers have a duty to recommend investment products and trading strategies that are suitable for their clients. When they recommend unsuitable investments, brokers and their firms can be held liable for damages. Those who have lost money from risky investments may have a cause of action against the broker who recommended that investment. Investors may be able to recover some or all of their financial losses.

If you lost money because of your broker’s actions, our investment fraud lawyers at Meyer Wilson may be able to help you fight for the compensation you deserve. We have worked with thousands of clients since we first opened our doors in 1999, and through our efforts have secured more than $350 million in verdicts and settlements. Fill out our online form today to schedule a free case evaluation, or call us at (614) 532-4576 to speak with a member of our firm over the phone.

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