Advisor meeting

As an experienced financial professional, you understand the value of building trust and providing high quality investment recommendations and wealth management services. Consumers have come to expect financial professionals to place client interests ahead of their own.

Regulation Best Interest (Reg BI), which was passed recently by the SEC, requires brokers and their broker-dealers to demonstrate that they are acting in the best interests of their clients by meeting four standards of conduct. The rule makes clear that if you meet the four obligations described in the regulation, you will have satisfied the “best interest” requirement. These rules are tailored to the broker-dealer business model, without restricting certain types of business, and they integrate well with requirements of the Investment Advisors Act of 1940 for registered investment advisors who are dually registered.

The challenges for financial professionals serving retail clients is that the implementation and on-going costs for the new rules may be significant. With Reg BI becoming effective September 10, 2019 and a June 30, 2020 compliance date, the timeframe to conform with the new rules is also aggressive.

There are several resources available to help you understand the rule including the full text of Regulation BI and SIFMA’s preliminary summary and guidance for broker-dealers.1, 2 These and other sources may be important to your specific business practices, operations and compliance.

To help you plan to meet the four obligations of Reg BI, the following is a brief overview of each, which may help as you evaluate impacts to your client service model. 

Disclosure obligation

Prior to or at the time of a recommendation, broker-dealers must provide full and fair disclosure of all material facts relating to the scope and terms of the relationship and all material facts relating to conflicts of interest related to the recommendation.

Disclosures should be concise, clear and provided in plain English, using simple sentences and active voice. Avoid legal jargon, highly technical business terms or multiple negatives. The use of graphics is allowed and encouraged, if helpful.

Much of the disclosure obligation will be handled with a Form CRS Relationship summary, which is similar in intent to the Form ADV delivered by registered investment advisors. Form CRS can be delivered electronically and must appear on your website. To help satisfy the disclosure obligation, broker-dealers are permitted to use other disclosures and standardized documents as well, such as prospectuses, account agreements, fee schedules and trade confirms.

A significant change for broker-dealers who are not dually registered is using the titles “advisor” or “adviser” would violate the disclosure obligation. That means any firm that is not a registered investment advisor must choose a new title for its representatives to use and update all marketing materials accordingly.

Registered representatives who are not Series 65/66 licensed may either choose a new title and update marketing materials (if currently using the term “advisor” or “adviser”) or pass the Series 65/66 license exam and register with the state or SEC as a registered investment advisor. The latter would also require compliance with the fiduciary requirements outlined in Investment Advisor Act of 1940.3, 4

Care obligation

Broker-dealers and their representatives must exercise reasonable diligence, care and skill when making a recommendation. It explicitly requires that recommendations—including recommendations regarding account types and IRA rollovers—be in the client’s best interest and that the broker-dealer does not place its interests ahead of the client.

In addition to understanding the potential risks and rewards relative to the client’s individual investment profile, the care obligation explicitly requires that cost be a consideration. Simply recommending the lowest cost investment does not meet all aspects of the care obligation. The care obligation includes a quantitative suitability requirement, meaning representatives must have a reasonable basis to believe a series of recommended transactions are in the customer’s best interest, and a requirement that the broker-dealer to consider “reasonably available alternatives.”

Conflict of interest obligation

Broker-dealers must:

1) Disclose all conflicts of interest associated with recommendations;

2) Mitigate any conflict that creates an incentive for the broker-dealer’s associated person to place their interests ahead of the client’s interests;

3) Disclose and mitigate material limitations on securities or products that may cause the broker-dealer to place its interests ahead of the client’s interests; and

4) Eliminate sales contests, quotas, bonuses and non-cash compensation based on sales of specific types of securities over a limited time.

The conflict of interest obligation does not prohibit offering proprietary products, dealing securities from inventory or selling securities underwritten by the firm or an affiliate of it, as long as all provisions are met.

Compliance obligation

Broker-dealers must have adequate compliance and supervisory policies and procedures in place to achieve compliance with Reg BI as a whole. This obligation includes recordkeeping requirements and all relevant documentation must be maintained for six years after the date the account was closed or the date on which the information was replaced or updated, whichever comes earlier.

  1. “Final Rule – Regulation Best Interest” retrieved fromhttps://www.sec.gov/rules/final/2019/34-86031.pdf
  2. “Regulation Best Interest: Preliminary Summary of Final Rules and Guidance” retrieved from https://www.sifma.org/resources/submissions/regulation-best-interest-preliminary-summary-of-final-rules-and-guidance/
  3. SEC information for new registered investment advisors retrieved from https://www.sec.gov/divisions/investment/advoverview.htm
  4. Full text of Investment Advisors Act of 1940 retrieved from https://www.law.cornell.edu/uscode/text/15/chapter-2D/subchapter-II