The North American Securities Administrators Association (NASAA) approved an amendment to its model Dishonest or Unethical Business Practices of Broker-Dealers and Agents rule, also known as its Conduct Rule.

That update will amend the model rule to incorporate a version of the SEC’s landmark 2020 Regulation Best Interest (Reg BI) into its standards for broker-dealer conduct. Several states have already incorporated Reg BI by reference into their statute books, including Texas most recently.

Reg BI established a heightened level of due diligence for broker-dealers, requiring them to act in the best interest of their clients, a step up from the SEC’s previous suitability standard, which required them to make recommendations suitable for their customers.

Importantly, Reg BI made it so that broker-dealers could not place their own financial interests above their clients. That heightened obligation required adherence to several relevant duties of care. Breaches of Reg BI resulted in significant SEC enforcement actions and millions of dollars in penalties during the Biden administration.

NASAA’s model rule also goes a bit further than the SEC’s by prohibiting misleading uses of the professional title “advisor” or “adviser,” a provision absent in Reg BI.

Previous model criticized

A 2023 proposal to integrate Reg BI at the state level from NASAA faced significant industry backlash, including from the Securities Industry and Financial Markets Association (SIFMA), which argued that it would create additional burdens on broker-dealers on top of the SEC’s rule by redefining or expanding the definitions of key terms.

SIFMA also stated in the same comment that the state integration was likely federally pre-empted by the federal rule.

NASAA’s updated model Conduct Rule underwent a significant comment period, and those redefinitions were eventually dropped in a re-proposed version of the rule from November 2024.

Future of state regulation

Some have speculated that as the SEC reduces enforcement across the board and focuses its enforcement power on fraud and manipulation, states will pick up the slack. The incorporation of Reg BI at the state level will provide state securities boards increased leverage to go after broker-dealers for conduct violations, although they will likely exercise divergent enforcement priorities.

NASAA members look to the model rules to formulate laws and regulations on the state level, although their ultimate adoption is voluntary.

“The amendments adopted today will boost investor protection and help foster uniformity on these important issues across federal and state law,” NASAA said in a statement.