SEC chairman Gary Gensler said Tuesday that his staff may soon publish strict rules for crypto platforms relating to the SEC’s “landmark” Regulation Best Interest mandate.
Regulation Best Interest says fiduciaries must provide investment advice in the best interest of their client. This means prioritizing their clients’ welfare over their own commissions, fees, kickbacks, or incentives.
Speaking at the spring symposium of the North American Securities Administrators Association, Gensler described how crypto exchanges and platforms are often ‘all-in-one’ destinations, mixing advice and broker dealing, and as such fall squarely within Regulation Best Interest’s purview.
The history of Regulation Best Interest
- The SEC introduced Regulation Best Interest rules for broker-dealers in 2019. This specified fiduciary duties of investment professionals.
- In March 2022, the SEC issued additional guidance forcing fiduciary advisors to put their clients’ interest above their own, delineating “reasonable alternatives” as opposed to simply alternative investments from which an advisor earns commissions, fees, or incentives.
- The SEC further warned about potential conflicts of interest for professionals with dual licenses or “dually registered or affiliated firms.” Connections to an inventory of crypto assets that are benefiting from retail buying at an affiliated firm is an obvious conflict of interest.
Regulation Best Interest also required investment advisors to take variables like a client’s investment goals, risk tolerance, income, assets, age, and debts into consideration when deciding which services to recommend.
More warnings about unregistered securities
Concluding his speech, Gensler reiterated his customary Howey Test warning to crypto asset issuers: “If investors are putting money behind a group of entrepreneurs raising money from the public in anticipation of profits, that’s the hallmark of an investment contract or a security under our jurisdiction.”
He acknowledged that investing websites and apps have caused controversy with digital tactics designed to manipulate investors into buying or selling. “This new digital world raises questions. Is a behavioral nudge… a recommendation?” Gensler asked.
Too much gamification in crypto
Gensler has repeatedly expressed concern about digital engagement practices used by financial websites and apps. He explains that too many elements of gamification can manipulate investors’ behavior without acting in the best interest of the client.
However, some politicians like Elizabeth Warren expressed concern about Regulation Best Interest. She said back in 2018 that it doesn’t do enough to protect retail investors, while pundits complained that judges and lawyers would pick it apart.
However, Regulation Best Interest has already withstood a legal challenge brought by a group of financial advisors. The US Court of Appeals for the Second Circuit upheld Regulation Best Interest in XY Planning Network, LLC, et al. v. SEC, et al case in July 2020.
Another large financial regulator, FINRA, is also integrating Regulation Best Interest into its crypto rule-making and plans to revise existing rules.