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SEC Issues Risk Alert: Here’s Why Your Broker Needs to Act in Your Best Interest


The Securities Exchange Commission (SEC) released a risk alert related to Regulation Best Interest (Reg BI) in order to highlight deficiencies noted during examinations conducted, as well as examples of weak practices that could result in deficiencies. This regulation generally provides that broker-dealers must act in retail clients’ best interests when making investment recommendations. We’ll discuss the findings by the SEC and how you can properly vet your broker-dealer.

If you are looking to grow your financial advisory business, check out SmartAsset’s SmartAdvisor platform.

What the Best Interest Standard Means for Broker-Dealers, Financial Professionals and Clients

Reg BI went into effect in June 2020 and requires broker-dealers to put their clients’ interests over their own when it comes to making investment recommendations. That includes any recommendations such as securities transactions and account recommendations (opening or closing an account).

Not complying with those rules could result in sanctions for broker-dealers or financial professionals, including in some cases, losing their securities licenses.

As part of Reg BI, brokers must make recommendations with reasonable care and diligence. And they must adhere to and enforce strict compliance standards. In addition, Reg BI requires brokers to disclose any relevant information about their relationship to the investment products they promote while endeavoring to identify, minimize and mitigate conflicts of interest that might incentivize the broker to make decisions in the best interest of his or her firm instead of the client.

SEC’s Reg BI Findings

The recent broker-dealer examinations conducted by the Division of Examinations to assess compliance with Reg BI uncovered that some broker-dealers didn’t have written policies and procedures that were created to be in compliance with the disclosure obligation. Essentially, brokers didn’t indicate when disclosures needed to be updated or created to match proper requirements in compliance.

Other findings included:

  • Procedures from some firms directed financial professionals to use available alternatives. However, those financial professionals were not given proper support on how to do so.
  • Procedures from some firms directed financial professionals to consider costs without proper support on how to do so.
  • Procedures from some firms designed systems for financial professionals to evaluate investment product costs or other available alternatives. But because firms did not mandate the use of those systems, they could not determine whether or not financial professionals utilized them.

In addition, some broker-dealers offered employee training that had information on Reg BI but didn’t identify their process for compliance with Reg BI. As an example, proper use of the systems wasn’t included during employee training.

How Clients Can Properly Vet Broker-Dealers

SmartAsset: SEC issues risk alert. Is your broker-dealer qualified to handle your investments?

It’s important to understand broker-dealers are not the same as financial advisors.

Generally, brokers are licensed to buy and sell securities and are registered with the Financial Industry Regulatory Authority (FINRA). An Investment Advisor Representative “financial advisor,” on the other hand, may offer advice about your investments and financial strategies and is registered with the Securities and Exchange Commission (SEC).

If you are investigating the credentials of a broker, consider using FINRA’s BrokerCheck. The service allows you to search and review securities professionals by their name, location and Central Registration Depository number.

Proper vetting also includes interviewing several brokers and getting a good idea about their credentials. Even asking them for their licenses can help you determine how qualified they are to speak on certain financial topics. If you are speaking to a broker-dealer, ask them if they have a Series 7 license or a Series 63 license.

Bottom Line

SmartAsset: SEC issues risk alert. Is your broker-dealer qualified to handle your investments?

If you are a client or a potential one, don’t hesitate to vet each broker-dealer that you speak to. FINRA offers multiple resources, including BrokerCheck to help you look up securities professionals by their Central Registration Depository number, location and name. And interview as many broker-dealer candidates as you can until you feel you have the right match.

Tips for Choosing a Financial Advisor to Work With

  • Consider working with a financial advisor as you create or modify your financial plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Make sure you ask the right questions of anyone you consider hiring as a financial advisor. Check that their qualifications and skills match the services you want out of your advisor.

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