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Bates News, Bates Research  |  09-05-18

What’s In A Name? NASAA Weighs In On Regulation Best Interest



The North American Securities Administrators Association (“NASAA”) encouraged the SEC “to make significant revisions to its April 18 Regulation Best Interest and related proposals (“Reg. BI”) before adopting them in order to best serve the interests of investors.”

In NASAA’s comment letter on Reg. BI, NASAA President and Alabama Securities Commission Director Joseph P. Borg emphasized that, “given our members’ shared responsibility with the SEC for oversight of the firms and individuals that will be impacted by the Proposals, NASAA is anxious to work closely with the Commission.” President Borg went on to say that he hoped that the “constructive comments are well received and considered fully.”

NASAA represents state, provincial and territorial securities administrators covering all 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico. NASAA cautioned the SEC to take it slow, be deliberate and, most importantly, to consider “significant improvements” in order to “promulgate final rules that will serve the best interest of investors as the Commission intends.” Bates Research takes a closer look at NASAA’s concerns and its recommendations to the SEC.

The Regulation Best Interest Proposal

As summarized in a previous Bates Research article, Reg. BI comprises three proposals. In brief, proposal one would require a broker-dealer to act in the “best interest” of a client investor and would require suitability determinations, disclosures of “key facts” that may suggest conflicts of interest, and further compliance obligations. Proposal two would provide interpretive guidance for advisers who have fiduciary obligations to investors. Proposal three would require that both broker-dealers and investment advisers provide a new Client Relationship Summary (“CRS”) to retail investors. The CRS defines differences between investment advisers and broker-dealers, based on the types of services offered, and delineates legal standards of care.

Start With the Name

In general, NASAA’s comments urge more definitional clarity. NASAA recommends that the SEC re-label the new regulation as the “Broker-Dealer Standard of Conduct” to reduce the likelihood of any confusion between a broker-dealer’s best interest duties and an investment adviser’s fiduciary duties.

NASAA responded to the proposed SEC approach to broker-dealer standards of conduct with recommendations to clarify and make more expansive the obligations of broker-dealers. For example, NASAA recommends that the broker-dealer’s duty should “encompass all investors and all securities products.” NASAA also recommends greater specificity, including that the SEC (i) clarify the requirements necessary to satisfy the new standards by adding specific factors that must be met; (ii) broaden the broker-dealer conflict of interest mitigation and disclosure obligations; and (iii) address current practices involving certain financial incentives by making them “per se incompatible” with the new standards. (The latter includes a ban on sales contests at broker-dealers and a ban on any preferential treatment to certain customers for investment opportunities.

Clearer Interpretive Guidance From the SEC

NASAA also recommends that the SEC provide much clearer interpretive guidance. The intent behind its guidance recommendations is to set more definitive borders between investment advisory and broker-dealer activities. For example, NASAA wants the SEC to spell out in greater detail how and which titles a broker-dealer may use when holding themselves out in the market. NASAA opposed the SEC position that a broker-dealer could satisfy its best interest duties by recommending securities from a limited number of firm-only products.  NASAA contends that firms need to consider competing asset classes and investment strategies outside their own offerings when counseling clients. This includes considering factors such as cost, complexity, liquidity and risk. NASAA also wants the SEC to spell out clear guidance on the rights and remedies investors will have in pursuing violations of the new standard. While so doing, NASAA wants the SEC to “expressly declare that the new standard is not intended to preempt any state laws or regulations.”

Form CRS: Is It Really Necessary?

NASAA’s official recommendation is that Form CRS undergo testing “to evaluate its usefulness to investors and, at such time as the form is adopted, allow firms some flexibility in implementing the disclosures so as to tailor the content for their customers’ needs.” NASAA, however, also believes that it would be better to simply revise Form ADV and Form BD to “incorporate investor education objectives into these existing forms, rather than bolting an entirely new form onto the existing disclosure structure.” According to NASAA, “Form ADV and Form BD are long overdue for reformatting and rewriting” and updating them “would be the best long-term solution to the problem of investor confusion” and would “reduce or eliminate duplication across these various forms.”  

Finally, with regard to future investment adviser registrations and continuing education requirements, NASAA recommended that the SEC defer to state securities regulators.


NASAA members are significant players in the ultimate resolution of these issues. NASAA’s comments represent a respectful, but firm approach that seeks clarity while asserting state interests. It is clear, however, that the SEC’s proposed rule would look very different than it currently does if the agency were to adopt NASAA’s “significant improvements.” NASAA acknowledged the challenge that the SEC faces:

“The Commission seeks through the Proposals to raise the duties of care owed by broker-dealers, address the confusion among investors regarding the differing conduct standards, and make clearer the various aspects of the fiduciary duty standard applicable to investment advisers, without favoring or disfavoring the broker-dealer or investment advisory business models. We recognize that threading this needle is not easy.”

Bates will continue to follow important developments in this story.