Reg BI Summary
On June 5, 2019 the U.S. Securities and Exchange Commission (SEC) approved a package of rules requiring brokerage firms to disclose potential conflicts with the fees investors pay and the commissions brokers earn when giving financial advice. With Regulation Best Interest, aka Reg BI, the SEC wants to hold brokers to a higher standard. The new regulation would require brokers to stop referring to themselves as advisors if they aren’t working under a fiduciary standard. The rules require brokers to raise the standard to meet a client’s best interest and avoid potential conflicts when recommending stocks, mutual funds and other financial products. In addition,it would impose four obligations on them:
- Disclosure Obligation:provide certain required disclosure before or at the time of the recommendation, about the recommendation and the relationship between you and your retail customer
- Care Obligation:exercise reasonable diligence, care, and skill in making the recommendation
- Conflict of Interest Obligation:establish, maintain, and enforce written policies and procedures reasonably designed to address conflicts of interest
- Compliance Obligation:establish, maintain and enforce written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest
What is Form CRS?
Regulation Best Interest also requires both RIAs and brokers to provide their clients with a new document that discloses key facts about a firm: Form CRS, a client relationship summary. This brief document outlines the services offered by a firm: all fees, costs, conflicts of interest, required standards of conduct associated with its services, and a review of the firm’s legal or disciplinary history.
Reg BI Amended Recordkeeping Requirements
The SEC amended Exchange Act Rules 17a-3 and 17a-4 to require firms to create and preserve records for obligations imposed by Regulation BI.
17a-3(a)(35): For each retail customer to whom a recommendation of any securities transaction or investment strategy involving securities is or will be provided, a record of all information collected from and provided to the retail customer pursuant to Regulation Best Interest, as well as the identity of each person who is an associate of a broker or dealer, if any, responsible for the account.
17a-4(e)(5): Broker-dealers are required to retain all records of the information collected from or provided to, each retail customer pursuant to Regulation Best Interest, for at least six years after the date the account was closed or the date on which the information was replaced or updated.
What to Expect During OCIE Examinations
The Office of Compliance Inspections and Examinations (OCIE) will begin examinations to assess the implementation of Reg BI. These initial examinations will likely occur “during the first year after the compliance date” and be designed primarily to evaluate whether firms have established policies and procedures reasonably designed to achieve compliance. OCIE will also evaluate whether firms have made reasonable progress in implementing those policies and procedures, the OCIE Risk alert stated.
In a recent press release, Financial Industry Regulatory Authority (FINRA) said they will take the same approach as the SEC when reviewing broker-dealers and their members for compliance with Reg BI and Form CRS.
Bottom Line: How to Comply With Reg BI
Modified Policies and Procedures: Firms should have updated their policies and procedures to reflect Reg BI changes. Brokers are expected to create their own additional policies to fulfill compliance with Regulation Best Interest. (Tip: review your current lexicon list versus Reg BI requirements and firm policies).
Regulatory Audit: Archiving all communications can assist with protecting the firms as the records can show the client’s best interests were met. This is the best defense for lawsuits and regulatory investigations.
Recordkeeping Compliance: Firms need to ensure they have the capabilities to capture, archive and reproduce content across multiple communications and social channels to comply with the amended Exchange Act Rules 17a-3 and 17a-4. This includes emails, message boards, electronic faxes, text messages, social media communications, tape or digital records of voice conversations, collaboration platforms, etc. stored in compliance with SEC’s standard.
Failing to comply with the new Reg BI obligations and can mean serious penalties for firms and their employees.
Author: Marianna Shafir Esq. Corporate Counsel, Regulatory Advisor at Smarsh
Marianna Shafir, Regulatory Advisor at Smarsh, is responsible for regulatory affairs worldwide. With her expertise in financial services industry, compliance and eDiscovery, Marianna counsels Smarsh clients on meeting regulatory obligations, leveraging technology and guidance on best practices related to electronic communications supervision. Prior to joining Smarsh, Marianna worked for BNY Mellon and Invesco where she was an instrumental member on compliance teams.Marianna has also served as an adjunct professor at New York Career Institute where she taught Law Office Management and Real Estate Law. She earned her Juris Doctorate from Nova Southeastern University. She is a frequent speaker at industry conferences and a contributor to various online publications.