Reg BI Gets “Green Light” from SEC

Ready or not – here it comes. On June 5, 2019, the Securities and Exchange Commission (SEC) held a meeting which resulted in the adoption of the long-debated proposal called Regulation Best Interest (Reg BI). The compliance date for Regulation BI is June 30, 2020. The documentation approved by the Commission totals more than 1,400 pages.

Two other items were voted upon and approved to accompany Reg BI. The commission voted to implement rules and forms requiring registered investment advisors (RIAs) and broker-dealers to provide a brief client relationship summary (Form CRS) to retail investors.

Form CRS would require all broker-dealers, RIAs and dual registrants to provide a form describing in plain language the firm’s relationships and services it provides to customers, including accounts offered. Included in the form would be a summary of fees and costs that a retail investor would incur by working with the firm.

In addition to a few other items, Form CRS would prohibit broker-dealers from using “advisor” as part of its name when communicating with retail customers. Also, the commission voted to publish an interpretation of the existing standard of conduct for RIAs.

According to the Commission, under Reg BI, broker-dealers will be required to act in the best interests of retail customers and may not put their financial interests “ahead of the interests of a retail customer when making recommendations.” Reg BI includes the following components:

Disclosure Obligation: Broker-dealers must disclose to retail customers the capacity in which the broker is acting, fees, the type and scope of services provided, conflicts, limitations on services and products, and whether the broker-dealer provides monitoring services.

Care Obligation: A broker-dealer must exercise reasonable diligence, care and skill when making a recommendation to a retail customer, with a clear understanding of potential risks, rewards, and costs associated with the recommendation.  The broker-dealer must then consider these factors in light of the retail customer’s investment profile and ensure that the recommendation is in the retail customer’s best interest, including the costs of the recommendation.

Conflict of Interest Obligation: The broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to identify and, at a minimum, disclose or eliminate conflicts of interest, which includes the elimination of sales contests, quotas, bonuses and non-cash compensation based on the sale of specific securities or specific types of securities within a limited period of time.

Compliance Obligation: Broker-dealers must establish, maintain and enforce policies and procedures reasonably designed to achieve compliance with Reg BI as a whole.

This information is not intended as authoritative guidance or tax or legal advice. Quest CE suggests you consult your attorney or tax advisor for guidance on how this change will affect your organization.