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Regulation Best Interest Essay


Security and Exchange Commission (SEC) is proposing a rule which would create a standard of conduct for the broker-dealers. This rule, called Regulation Best Interest, aims at addressing the concerns over conflicts of interests for broker-dealers who provide investment advice to retail customers. Broker-dealers play a critical role in assisting Americans plan and organize their financial lives by saving and investing wisely to have financial independence in the long run. The broker-dealers advise how Americans can invest their savings wisely and get reasonable returns on the investments (Regulation Best Interest, 2018). There exists a principle-agent relationship between broker-dealers and retail customers. It is expected that the broker-dealers should work for the interests of their clients by acting in good faith. However, in most cases, they are tempted to perform for their interests rather than those of their clients. Yes, I agree with the proposal by SEC to establish Regulation Best Interest to deal with conflict of interests for broker-dealers who offer investment advice to retail customers.

Regulation Best Interest would ensure that retail customers get quality advice which would maximize their returns. This rule would prevent them from putting their firm’s financial interests ahead of those of the retail customers when offering investment recommendations. There would be investor protection and preservation to the access and choice for investors in investment decisions. Some investors prefer “pay as you go” model when dealing with broker-dealers, and Regulation Best Interest would enhance their protection in their transactions (Regulation Best Interest, 2018). The rule will compel the broker-dealers to act professionally and in good faith in catering for the interests of the retail customers.

There is a possibility of broker-dealers dealing with high-paying investors, and hence, bypassing small retail customers once the Regulation Best Interest becomes a law. There is no law which can prevent them from choosing the type of customers they want to deal with as far as they stick to their core business. Corruption may arise when the broker-dealers try to benefit from customers who are willing to pay high prices for the service. Since there is a free market, they may result in dealing with high-paying customers, and this would be a disadvantage to small retail customers. This rule needs to consider this possibility and offer real remedies.

The possibility of broker-dealers to prefer dealing with high-paying investors and bypassing retail customers would have insignificant effects in the market as there will be new entrants to cater for the different segments of customers. Any business operates under both supply and demand forces. Since there will be high demand from small retail customers, the industry will experience the entry of new broker-dealers. The market will continue to operate under the regular forces of demand and supply.

In conclusion, Regulation Best Interest is a good rule which will bring sanity in the brokerage of stocks. This rule will require the broker-dealers to offer investment advice by acting on the best interests of the retail customers. The quality of investment advice provided would enable the retail customers to meet their ultimate goal of maximizing their return on investments. The rule is an essential milestone in helping Americans have a culture of saving and investing when dealing with poverty. The standards of living will increase significantly upon the implementation of this rule. The relevant stakeholders should collaborate in implementing this rule.

Regulation Best Interest (83FR21574). (2018). Retrieved from Securities and Exchange Commission website: https://www.federalregister.gov/documents/2018/05/09/2018-08582/regulation-best-interest
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