What is “Best Interest”?

The U.S. Securities and Exchange Commission does not define “best interest” in Regulation Best Interest.  So how are we supposed to comply with a concept without a definition?  Good question.  We have to look to guidance from the Securities and Exchange Commission and FINRA on what they mean by best interest.  

SEC Chairman Jay Clayton has stated that they took a principles based manner rather a prescriptive approach saying, “This principles-based approach is a common and effective approach to addressing issues of duty under law, particularly where the facts and circumstances of individual relationships can vary widely and change over time, including as a result of innovation. This approach to determining what is in the “best interest” of a retail customer is similar to an investment adviser’s fiduciary duty, which has worked well for advisers’ retail clients and our markets. Indeed, there is no definition of “best interest” under the Advisers Act.”

Richard Ketchum, former CEO of FINRA, started talking about Best Interest in 2011.  The Examination Priorities Letter of that year brought up that compensation arrangements could create incentives for brokers to engage in conduct contrary to the best interests of their clients, and must review for and supervise these potential conflicts.” In a speech in 2012, he said, “Before any complex product is offered to a retail client, your financial adviser should be able to write down on a single page why this investment is in the best interests of your client. This does not have to wait until you find out the details of any fiduciary rulemaking the SEC may make. Being able to articulate why an investment is in the best interests of your client is fundamental to what the securities industry must be about if it is to deserve the trust of investors. The time to do it is now.”  In 2013, he stated it in a different way, “Worry less about the legal standpoint; worry more about it from a cultural standpoint.”  

So we can see that the industry has been moving toward a best interest standard for a number of years.  As you all know, we have made it a part of the way we do business since the beginning. One of my favorite compliance meetings was in 2010 when I first used Cowboys Ethics.  The first slide of that presentation was “Do the Right Thing.”  If we all go back to the Code of the West, we all will be inspired to do better and be better than we are.  That includes making recommendations that are best for our clients and not putting our own interests above theirs.  

If you would like some practical guidance, FINRA has put together a good checklist for financial professionals (remember, you can no longer refer to yourself as a financial adviser) to use as you make recommendations and offer disclosure. https://www.finra.org/sites/default/files/2019-10/reg-bi-checklist.pdf.  

Remember, doing the right thing is always the right thing. 

Z. Jane Riley, Chief Compliance Officer