Overview: New SEC Regulation Best Interest (Reg BI)

New SEC Regulation Best Interest (Reg BI) raises the bar for broker-dealer conduct when making recommendations to retail customers. Effective June 30, firms are required to “do the right thing” for customers instead of what is within the “zone of appropriateness.”

This regulation goes beyond existing suitability standards. Reg Bl states that firms cannot put their financial interests ahead of the interests of a retail investor, and that there must be clear disclosure of any financial incentives, conflicts of interest, and other available alternatives that were considered in making a recommendation. For example, under suitability standards, it was permissible to recommend a stock or mutual fund that was appropriate for a customer’s need even if it cost the customer more and generated more compensation for the firm; under Reg BI, however, this is not in the customer’s best interest.

FINRA and MSRB suitability rules will be modified for Reg BI. Following implementation, these rules will apply more narrowly to recommendations to entities and institutions, such as pension funds, small businesses, and charitable trusts. Reg BI applies only to recommendations for retail individuals, their families, and their households.

Because investment advisors are already subject to the more stringent fiduciary standard, they are not subject to Reg BI when making recommendations. However, representatives of dually registered firms (those registered as both an IA and a BD), must disclose their role in a transaction and adhere to Reg BI if representing the broker-dealer.

Obligations Under Regulation Best Interest (Reg Bl)

Under Reg BI, a recommendation is any communication that could be viewed as a call to action and would influence an investor’s behavior, including those that involve:

• Specific securities (to buy, sell, hold XYZ or XYZ fund)
• Specific account types (to open an IRA account or other brokerage account)
• Rollovers or transfers (to move a workplace retirement plan or change IRA trustees)

To comply with Reg BI, firms must address these four obligations:

Disclosure Obligation

Provide certain required disclosure about the recommendation and the relationship with the retail customer (see below).

Care Obligation

Exercise reasonable diligence, care, and skill in making the recommendation.

Conflict of Interest Obligation

Establish, maintain, and enforce written policies and procedures to address conflicts of interest, including those associated with proprietary products, payments from third parties, and compensation programs. Sales contests and quotas around the sale of a particular product are no longer permitted.

Compliance Obligation

Establish, maintain, and enforce written policies and procedures to achieve compliance with Reg BI.

Customer Relationship Summary Requirement

To comply with Reg BI’s disclosure obligation, a Customer Relationship Summary (Form CRS) must be provided to retail customers or prospective clients at or prior to a recommendation. This summary is intended to help the recipient compare financial services providers and their products. It must be written in plain English, cannot exceed two pages, and must present information in the order prescribed by the SEC, for ease of comparison.

The relationship summary must explain:

• The types of services the firm offers
• The fees, costs, conflicts of interest, and required standard of conduct associated with those services
• Whether the firm and its financial professionals have reportable legal or disciplinary history, and
• How to get more information about the firm

The relationship summary must also include questions called “conversation starters” to help customers begin a discussion with an adviser or broker about the relationship.

The relationship summary must be available upon request without charge and can be in paper or electronic format. If information on the summary changes, firms must updateFINRA’s Central Registration Depository (CRD) or the Investment Adviser Registration Depository (IARD) within 30 days. Customers must receive a new relationship summary or communication of the changes within another required disclosure (like an account statement or privacy notice) within 60 days of the change.

The current version of the relationship summary must be prominently displayed on firm public websites. Firms must also retain, for a minimum of six years, a record of the date a relationship summary was provided to each retail investor.

Investment advisers must update Form ADV with information required on the relationship summary. The portion of Form ADV that includes this information has been designated as Form ADV, Part 3.

Licensing Exam Questions on Reg BI

If you are taking a licensing exam after June 30, 2020, you may see questions about Reg BI on your exam. The exams that may include questions on Reg BI are: SIE, Series 4, Series 6, Series 7, Series 10, Series 24, Series 52, Series 63, Series 65, and Series 66. The Knopman Marks Training Center includes updated materials to help you prepare.

Knopman Marks is offering free review sessions to Series 65 and Series 66 Exam candidates. All candidates of broker-dealers, registered investment advisers, and dual registrants who need to pass one of these exams—even those not preparing with Knopman Marks—are welcome.

Free Webinars for Series 65 and Series 66

• Wednesday, June 17 – 2:30-3:30 pm (EST) – The first webinar will cover financial analysis concepts.
• Wednesday, June 24 – 2:30-3:30 pm (EST) – The second webinar will cover suitability and recommendation concepts.

REGISTER HERE to join us for two free webinars that will provide expert coaching on highly testable Series 65 and Series 66 concepts.

Reach out to our team at support@knopman.com with any questions.