Compliance is king in the finance industry, but even when you have a full-time CCO employed at your firm, it can be hard to keep up with the latest regulatory compliance changes. The past few years have brought several changes for financial advisors and broker dealers alike, and arguably most notable is the Regulation Best Interest (Reg BI) amendment to the Securities Exchange Act of 1934.
Seven Common Questions About the Regulation Best Interest
With the first and (thus far) only Reg BI offense alleged midway through 2022, it’s worth revisiting some common questions surrounding the Reg BI and reviewing your policies and procedures to ensure compliance.
1. What is Regulation Best Interest?
Reg BI was first introduced by the Securities and Exchanges Commission (SEC) in April of 2018. After months of speculation and public commentary, it was officially voted into law in June of 2019. The rule’s overall goal was to implement a best practice guide for broker-dealers that would mirror the fiduciary standard under which many advisors operate.
There are four components and obligations of Reg BI: care, disclosure, conflicts of interest and compliance.
According to the SEC’s final ruling, under the Reg BI care obligation, a broker-dealer “must exercise reasonable diligence, care, and skill when making a recommendation to a retail customer.”
The Reg BI disclosure obligation details how a broker-dealer must disclose every piece of information pertaining to the client-broker relationship in writing prior to or at the time of a recommendation, while the conflict-of-interest obligation requires broker-dealers to have proper policies and procedures in place to prevent and address any conflicts of interest.
Lastly, the compliance obligation requires broker-dealers to have written and enforced policies and procedures that document their efforts to meet these regulatory requirements.
2. Why does Regulation Best Interest exist?
As stated above, the general goal of Reg BI was to ensure that advisors and their clients were made aware of all potential implications to their investments when working with a broker-dealer.
Reg BI came about after the short-lived Fiduciary Rule was officially vacated in June of 2018. The Department of Labor (DOL) introduced the Fiduciary Rule to expand the fiduciary duty by requiring every professional that made investment recommendations or solicitations to comply with the fiduciary duty.
While the rule would have offered more protection for individual investors, it also likely would have increased compliance costs and lowered commissions for brokers. In the end, the hotly-debated rule was put to bed under the Trump administration, and instead replaced by Reg BI – which offers additional protection for investors without the full fiduciary duty for broker-dealers attached.
3. Who does it apply to?
Regulation Best Interest regulations apply to all broker-dealers, as well as any associated persons – including any employees or partners associated with the brokerage.
The rule does not apply to financial advisors or their associates, who should conform to their legal fiduciary duty as well as comply with all Form CRS requirements.
4. What’s the difference between Reg BI and Form CRS?
Regulation Best Interest is the overall rule broker-dealers are required to comply with, whereas the Form CRS is a “client relationship summary.”
Brokers (and advisors, for that matter) who work directly with retail investors should complete a Form CRS in compliance with the disclosure obligations detailed in the Reg BI’s requirements.
A Form CRS should include:
- The types of clients you work with.
- Services offered (i.e., scope of work).
- Fees for those services.
- Any potential or real conflicts of interest.
- Any disciplinary history.
- All other pertinent information a retail investor should know.
If you are a broker-dealer who does not work with retail investors, you are not required to file a relationship summary.
5. What disclosures should I be aware of?
Depending on the structure of your firm, you may be required to disclose items specific to your individual representatives, such as representative-specific conflicts of interest, compensation structures and/or fee arrangements that need to be disclosed under these obligations.
The best way to ensure you’ve explored all required disclosures is to implement a system of collecting, analyzing and notifying all necessary parties. While these processes may seem time-consuming, there are several software solutions available to help streamline these systems and prevent compliance errors.
6. What are the consequences of lapses in Regulation Best Interest compliance requirements?
The first ever Reg BI enforcement took place in June 2022, when the SEC charged Western International Securities, Inc. and five of its representatives with failure to comply. The complaint alleges that the firm sold $13.3 in million in high-risk bonds to risk-averse investors – a clear violation of Reg BI guidelines.
While it’s unclear at this time what the consequences of these alleged violations will be, it is a clear sign that Reg BI will be strictly enforced.
7. How can I comply with Regulation Best Interest?
One of the best ways you can ensure your firm and individual broker-dealers remain compliant with Reg BI is to implement software capable of preventing, identifying and archiving your compliance efforts.
NRS has a full suite of services to help you launch your compliance efforts and stay confident in your ongoing program effectiveness, including:
- Reg BI-targeted compliance reviews.
- Policy and procedure content and updates.
- Form CRS technology and consulting solutions.
- And more
When it comes to compliance, faulty systems and Regulation Best Interest infractions can cost you current clients, potential business and ongoing financial consequences. But, equipped with the proper software system, you can identify and prevent compliance issues and remain on track with Regulation Best Interest requirements.
NRS works directly with broker-dealers to master compliance with confidence. Schedule a demo to learn more about our solutions for broker-dealers, investment advisors and hedge fund managers.