Fiduciary Commentary | Summer 2019 | SEC Adopts Best Interest Regulations

By: Brant Griffin

SEC Adopts Best Interest Regulations

On June 5, 2019, the Securities and Exchange Commission voted to adopt Regulation Best Interest (Regulation BI). The SEC’s action, supported by the broker-dealer industry, comes a year after regulators first proposed the package of initiatives. The Regulation is designed to raise the advice standard for broker-dealers when making investor recommendations above the current suitability rule. In a 3-to-1 vote, the commissioners approved the Regulation Best Interest and other initiatives to enhance disclosures and to provide greater transparency to investors with their relationships with broker-dealers.

Many investors believe that the advice they receive from financial professionals is objective when it is often biased in favor of investments that produce the greatest revenue or a tangential benefit for the advisor or firm. While the Best Interest Regulation would represent an improvement over the low-threshold suitability standard, many industry participants and investor advocates opposed the regulations on the grounds that it did not go far enough to protect investors’ interests.


SECCurrently, the laws governing the standards of conduct for providing advisory services is nothing short of chaotic.  Opposing rules apply different legal frameworks depending on the structure of the organization providing the services. As a result, some investors receive substantially different standards of advice depending on the type of organization they have engaged in.

A fiduciary relationship is viewed as the highest standard of advice available under the law and requires the fiduciary to put the clients’ interests first when making investment recommendations. Currently, a non-fiduciary stance subjects investors to a different, less demanding, “suitability standard” where their investment recommendations must simply be “suitable” for the client at the time the investment is made. This standard does not legally obligate a broker or firm to put the interests of their clients ahead of their own. In fact, it permits them to do the opposite.

Regulation BI attempts to substantially enhance the broker-dealer standard of conduct to serve retail investors better. Supporters say that this represents an improvement over the current “suitability” standard that brokers are held to today.


The Regulation BI and related requirements become effective 60 days after publication in the Federal Register. At present, by June 30, 2020, registered broker-dealers must comply with the new regulations.

Regulation Summary

Regulation BI has a “general obligation,” which requires that a broker or broker-dealer comply with four-component obligations when making a recommendation to a retail customer. The general obligation requires broker-dealers and their brokers to act in their clients’ best interest when providing investment recommendations without placing their financial or other interests ahead of the investor’s interests.

Further, the rule extends to all account types, including individual retirement accounts and recommendations to roll over or transfer assets in a workplace retirement plan account.

The regulation provides that there is a “general obligation” to act in the customer’s best interest and is satisfied by complying with the following specific obligations:

  • Disclosure Obligation: Broker-dealers or associated person must disclose material facts about the relationship and the investment recommendation. These disclosures include the capacity the broker is acting, fees, type, and scope of services provided, any limitations, and if the broker-dealer provides investment monitoring services.
  • Care Obligation: Broker-dealers or associated person must exercise reasonable diligence, care, and skill when making an investment recommendation. The potential risks, rewards, and costs with the investment recommendation must be understood. These factors must be considered in light of the customer’s investment profile to ensure there is a reasonable basis to believe the recommendation is in the client’s best interest. The final regulation explicitly requires the broker-dealer to consider the costs of the investments before making a recommendation.
  • Conflict Obligation: The broker-dealer must establish, maintain, and enforce policies and procedures intended to identify and disclose conflicts of interest. Specifically, policies and procedures must be maintained to:
    • Mitigate conflicts that create an incentive for the associated persons to place their interests ahead of customers.
    • Prevent material limitations on investment offerings (such as proprietary only investment menus) from causing the firm or associated persons to place their interests ahead of their customers.
    • Eliminate sales contests, sales quotas, bonuses, and non-cash compensation that are related to the sale of specific securities.
  • Compliance Obligation: Broker-dealers must establish, maintain, and enforce policies that are designed to ensure compliance with the regulation.

The proposal includes a list of activities that fall outside the scope of a recommendation, including:

  • General financial and investment information
  • Descriptive information about an employer-sponsored retirement plan
  • Certain asset allocation models
  • Interactive investment materials that incorporate the exclusions

Furthermore, the SEC also adopted new rules that require both broker-dealers and RIAs to provide investors with a “customer relationship summary” (Form CRS) that summarizes the investment relationship. Firms will summarize information about the investments, services, fees, conflicts of interests, standards of conduct, and the disciplinary history of the firm and its representatives.

The regulation does not apply the existing RIA fiduciary standard to broker-dealers and is not a fiduciary standard. The general obligation does not propose to require broker-dealers to make conflict-free recommendations. It does, however, require broker-dealers to take steps to reduce conflicts of interest that might encourage a conflicted recommendation. Products that have higher costs, risks, or produce higher fees to the broker-dealer may be offered if each of the four components is satisfied.


Many practitioners believe that all investment and financial advice should be held to a fiduciary standard because the cost to those receiving conflicted investment advice is too high to ignore*. Wall Street has a strong financial incentive to maintain the status quo, and critics believe there is too much money being made to effect real change – and again investors’ interest will be subordinated to the interests of Wall Street.

* According to the White House’s Council of Economic Advisors, the cost of tainted investment advice is approximately $17 billion annually.

Jim Scheinberg is featured on latest PLANSPONSOR article on a plan sponsor’s duty to monitor retirement plan advisers

Jim Scheinberg, our Managing Partner at North Pier Search Consulting, was recently featured on PLANSPONSOR’s article “What to Look for When Monitoring Retirement Plan Advisers” by Lee Barney, released on June 21st, 2019.

“…few sponsors are aware of their need to stay on top of their advisers’ regulatory filings, but just as sponsors now know that they need to continuously monitor their recordkeepers…the same will happen with advisers” – Jim Scheinberg

Learn more about the industry trend towards monitoring plan advisers as best practice here.


[DRAFT 6-25] SM post_PlanSponsor Article 6-21-2019

Jim Scheinberg will speak at Commonfund’s Investment Stewardship Academy at Yale University’s School of Management (June 24 – 28, 2019)


Jim’s back on the 401(K) Fridays Podcast discussing ERISA’s Duty to Monitor, this week with Rick Unser!


Listen to Jim Scheinberg‘s conversation with host Rick Unser about current issues and latest practices regarding retirement plan sponsors’ and fiduciaries’ duties to monitor their service providers. This discussion will cover prescribed oversight of:

  • Recordkeepers
  • Advisors/Consultants
  • 3(38) and OCIO Managers
  • Defined Benefit Actuaries

and others you may not have thought about!

Listen to the interview here or your favorite podcast platform.


Benefits Pro, On the hunt: How 401(k) plan sponsors can revamp the advisor selection process

Read our Search Practice Leader, Gregory Metzger‘s latest article about selecting plan advisors in 401(k) plans, now featured in BenefitsPro

Read the article here: 5-20-2019_Linkedin Search Updates_Greg Metzger_BenefitsPro-On the hunt-How 401(k) plan sponsors can revamp the advisor selection process_5-10-2019

Fiduciary Commentary | Spring 2019

By: Brant Griffin

Retirement Legislation Update – Here we go Again

The most comprehensive changes to the retirement systems since the Pension Protection Act of 2006 is finally gaining momentum in Congress. In April, the House Ways and Means Committee approved the bipartisan retirement legislation the SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019). The legislation packages many of the small issues that have arisen since then into a comprehensive bill.

The SECURE Act is the result of a multi-year, bipartisan process and has the support of many key lawmakers. The legislation includes many of the elements of the Senate’s 2018 legislation Retirement Enhancement and Savings Act (or RESA) that was approved by the Finance Committee but never went to a full vote.

Legislative Detail

The proposal represents a broad effort to expand opportunities for savers. The legislation is a mix of several needed updates to US retirement legislation enhancements to encourage additional retirement savings. The breakdown of the bill’s developments are as follows:

Incentives to adopt an employer-sponsored retirement plan

  • Pooled Employer Plans. Permits unrelated employers to combine their resources and adopt a new type of Multiple Employer Plan or MEP; referred to as Pooled Employer Plans.  Additionally, the bill addresses a previous limitation of these plans by providing relief from the “one-bad-apple” rule that disqualification of one plan effect of an entire MEP.
  • Small Employer Plan Start-Up Credit. Increases the tax credit provided to small employers with 100 or fewer employees to establish plans with an automatic enrollment feature.
  • Plan Adoption Date. It allows an employer to adopt a qualified retirement plan up to the tax filing deadline for the employer’s tax return.

Promoting lifetime income feature from retirement plans

  • Fiduciary Safe Harbor for Selection of Lifetime Income Provider. Creates a new fiduciary safe harbor for employers when choosing group annuity issuers as plan investments. A sponsor would be deemed to have satisfied its fiduciary requirements with respect to the selection of the insurer if the fiduciary receives certain representations from the product provider as to its satisfaction of state insurance laws.
  • Lifetime Income Portability. Addresses the portability of the investments by permitting participants to make direct trustee-to-trustee transfers of a plan lifetime annuity.
  • Lifetime Income Disclosures. Requires employers to provide defined contribution plan participants with an estimate of the amount of monthly annuity income the participant’s balance could produce in retirement.

Other changes to qualified retirement plans

  • Long-term Part-Time Employees. Requires 401(k) plans to allow participation by long-term, part-time employees who work at least 500 hours for three consecutive 12-month periods.
  • Increase on Limit on Automatic Enrollment Safe Harbor Default Rate. Increases the automatic contribution rates to 15 percent from 10 percent for the automatic enrollment safe harbor 401(k) plan nondiscrimination rules limit to be met.
  • Nonelective 401(k) Safe Harbor Changes. Simplifies the safe-harbor 401(k) rules by (1) eliminating the safe harbor notice requirement for nonelective 401(k) safe harbor plans; (2) allowing an amendment to become a nonelective 401(k) safe harbor plan at any date before the 30th day before the close of the plan year. Amendments would be permitted after the 30th day before the end of the plan year if the plan if a nonelective contribution of at least 4 percent of compensation (rather than 3%) for all eligible employees and the amendment is made by the last day for distributing excess contributions for the plan year, that is by the close of following plan year.
  • Required Minimum Distribution Rules for Death Distributions. Changes to the post-death required minimum distribution (“RMD”) to generally require that all distributions after death to beneficiaries (with certain exceptions for spousal and minor children) be made by the end of the tenth calendar year following the year of death.
  • Age for Required Beginning Date for RMDs.  Increases the age at which required minimum distributions must begin from 70 ½ to 72.

All House tax bills are required to adhere to the pay-as-you-go budget rules. The cost to implement the SECURE Act is offset by the provision to accelerate inherited IRA and retirement plan distributions. This stepping up of taxable distributions is estimated to raise over $15 billion.

There is a significant amount of interest in Congress on retirement security prompting lawmakers to again push through an update to the US retirement system. Features of this legislation have been debated for years and have widespread support among both parties. Politicians on both sides of the aisle have been working on retirement legislation for several years, and the SECURE Act has a real likelihood of passage.

Announcement: Jim Scheinberg was a special guest on the Enterprise Radio podcast hosted by Eric Dye, on An Overview of the Outsourced-CIO Trend

Click here to listen to the podcast.

Listen to host Eric Dye & guest Jim Scheinberg discuss the following:

  1. What is an outsourced chief investment officer, and what is their role within a business organization?
  2. The OCIO model has been gaining popularity in recent years. What’s causing this trend?
  3. What factors should board members and investment committees consider when selecting an OCIO?
  4. Where can business organizations find help in selecting an OCIO?
  5. What type of growth and changes do you foresee in the OCIO space over the next five years?

LinkedinUpdate5-2-2019_EnterprisePodcastNetwork_podcast_podcast posted 5-1-2019_An Overview of the Outsourced-CIO Trend