North American Securities Administrators Association Amends Its Model Business Conduct Rule

On April 7, 2025, the North American Securities Administrators Association (NASAA) announced that its members voted to adopt amendments to its Model Rule on Dishonest or Unethical Business Practices of Broker-Dealers and Agents (Model Rule Amendments) that do the following:

1. add a best interest conduct standard applicable to broker-dealers and agents in light of Regulation Best Interest (Reg BI)
2. prohibit misleading uses of the title “advisor” or “adviser”

The stated intent of the Model Rule Amendments is to update the Model Rule in light of the SEC’s 2019 adoption of Reg BI, and other developments in the securities industry.¹ Any state that chooses to adopt the provisions from the Model Rule Amendments will need to amend its relevant rules and regulations to effect the change.² Furthermore, a state is free to revise the language of the Model Rule Amendments to conform the verbiage to the state’s particular statutory and regulatory structure. NASAA has indicated its intention to work with states to implement the updated standards contained in the Model Rule into state securities laws.³

Best Interest Standard Provision

The first Model Rule Amendment adds a requirement that broker-dealers or agents make recommendations to retail customers in the customer’s best interest, whether that be based on their investment profile, potential risks, rewards, and costs or other obligations imposed by Reg BI. Of note, the suitability provision in the Model Rule remains unchanged by the Model Rule Amendments.

Use of the Term “Adviser” or “Advisor” Without Licensure Provision

The second Model Rule Amendment prevents broker-dealers from using the title “advisor” or “adviser” without licensure as either an investment adviser or an investment adviser representative. NASAA noted that some jurisdictions’ laws permit the use of the title “advisor” or “adviser” in other circumstances and that the Model Rule Amendments will not prevent the use of the title if it is “otherwise permitted by law” within the context of those jurisdictions.⁴

Through this provision, NASAA aimed to address investor confusion as well as what it calls “deceptive and unethical” misuse of the titles by broker-dealers.⁵ NASAA expressed concern that investors might not know the difference between the two business models of investment advisers and broker-dealers and might therefore have a false impression of the fiduciary duties they are owed by their representatives.⁶

Potential Implications of Model Rule Amendments in the Context of the State Securities Regulatory and Enforcement Landscape

Acting Chairman Uyeda’s Recent Comments at the Annual Conference on Federal and State Securities Cooperation

Notably, the adoption of the Model Rule Amendments came one day before the SEC’s acting chair, Mark Uyeda, spoke at the Annual Conference on Federal and State Securities Cooperation (Acting Chairman Uyeda’s speech is available here). Acting Chairman Uyeda discussed areas in which he believes the division of regulation between states and the SEC warrants reevaluation. Specifically, Acting Chairman Uyeda discussed increasing the threshold at which midsize investment advisers must register with the SEC, rather than the relevant state(s), and modification of the types of securities transactions for which federal securities laws preempt state laws with respect to registration or qualification and the degree of such preemption.

If the threshold at which a firm must register with the SEC, rather than a state, does increase in the future, more midsize advisers would be primarily regulated by states rather than by the SEC, bringing more investment advisers within the regulatory purview of the state regulators. In that scenario, the concern with investor confusion between investment advisers and broker-dealers addressed by the Model Rule Amendments could become a greater priority for the states.

Model Rule Amendments and State Enforcement Actions

As discussed above, increased state interest in preventing customer confusion between an investment adviser and a broker-dealer could manifest in increased enforcement activity with respect to broker-dealer use of the title “adviser” or “advisor.” In addition, the Model Rule Amendment regarding Reg BI may portend increased state interest in SEC and FINRA settlements that relate to Reg BI and potentially following up with inquiries of their own. In addition, states could initiate investigations into alleged Reg BI violations even in the absence of such inquiries by the SEC and FINRA.

We have already seen states actively investigating potential Reg BI violations, sometimes as part of multistate coalitions, and we expect this activity to increase, especially if the states perceive the SEC and FINRA to be insufficiently aggressive in this area. The Model Rule Amendments, and any subsequent adoption of the Model Rule Amendments by individual states, may only accelerate this state enforcement activity.

As a general note, firms should exercise caution when negotiating settlements with state regulators for rule violations characterized as “dishonest or unethical.” In certain circumstances, findings of such rule violations can trigger unwanted collateral consequences, such as disqualifications automatically triggered under the federal securities laws.

¹ NASAA Request for Public Comment, Proposed Amendments to the NASAA Model Rule, Dishonest or Unethical Business Practices of Broker-Dealers and Agents (Nov. 4, 2024), https://www.nasaa.org/wp-content/uploads/2024/11/FINAL_Request-for-Public-Comment_Amendments-to-DU-Nov.-2024.pdf.

² Certain states have previously adopted “best interest” standards similar to the Model Rule Amendments.

³ NASAA Request for Public Comment, supra note 1.

⁴ Id.

⁵ Id.

⁶ Id.