The North American Securities Administrators Association Inc. (NASAA) is proposing revisions to its model rule on broker-dealer misconduct to add a best interest standard and to prohibit the use of misleading titles.
The umbrella group of U.S. state and Canadian provincial regulators published planned changes to its model rule, first adopted in 1983 and most recently updated in 2022, which sets expectations for ethical conduct in the brokerage industry. U.S. state securities regulators can then base their own local rules on the NASAA model rules.
The proposals, which are out for comment until Dec. 19, are intended to update the rule to reflect the demands of the U.S. Securities and Exchange Commission’s (SEC) conduct rule, known as Regulation Best Interest (Reg BI), by adding a best interest standard to NASAA’s model rule, as well as provisions regarding the use of the “advisor” and “adviser” titles.
While the rule was amended two years ago, NASAA said the current version “may not fully account for revisions to federal conduct standards for broker-dealers and agents arising out of the adoption of Reg BI by the SEC.”
The current version also doesn’t reflect the increased blurring of the distinction between brokerage and advisory service models, it noted.
The group first sought comment on proposed changes to incorporate Reg BI into the model rule in the fall of 2023. Following that consultation, NASAA revised its proposals to include adopting the “core principles of the best interest conduct standard” along with changes regarding the use of titles.
The model rule would retain existing provisions that impose suitability obligations on brokers and their reps, “as the protections emanating from the suitability rule extend further in various respects than Reg BI,” the proposal noted.
Most notably, the model rule’s suitability requirements apply to all broker recommendations, while Reg BI applies only to recommendations made to retail investors.
Additionally, the new section on the use of titles would prohibit reps from using certain titles without being licensed as either an investment adviser or an investment adviser rep.
“This section prevents broker-dealers and agents from misleading investors regarding the professional capacity in which their services are provided,” NASAA said, and aims to ease investor confusion that may result from the blurring of brokerage and advisory services.
The regulators said they believe “it is a deceptive and unethical practice for broker-dealers to mislead investors into believing the broker-dealers are acting in a fiduciary capacity with an ongoing duty of loyalty through misuse of the ‘advisor’ and ‘adviser’ title.”
NASAA noted that state regulators’ compliance exams have found that firms continue to allow reps to use these titles without being formally licensed or registered in that capacity.