The Securities and Exchange Commission (SEC) issued its final decision on its three-part reform package last month, featuring the Regulation Best Interest (REG BI). The regulation will require broker-dealers to increase their disclosures and act in their client’s best interest when giving financial recommendations.
Substantially enhancing standards beyond the existing suitability regulation that only requires broker dealers to provide recommendations that are suitable for their clients, REG BI legally requires broker-dealers to place their clients’ interests above their own.
Four Major Components to REG BI
The regulation introduces four major obligations that broker-dealer must comply with: Disclosure, Care, Conflicts of Interest and Compliance.
The Disclosure Obligation requires that broker-dealers provide material facts about their relationship with clients, including the scope, terms, and any conflicts pertaining to the firm’s recommendations.
Under the Care Obligation, broker-dealers must exercise diligence, care and skill in making recommendations to their clients. They must now consider each client’s investment portfolio and recommendations solely on the client’s best interests and explain any risks, rewards and costs associated with recommended transactions.
The Conflicts of Interest Obligation mandates that all broker-dealers adopt written policies and procedures that require the mitigation or even elimination, when possible, of conflicts of interest that create an incentive to recommend investments that are not in a client’s best interest.
The Compliance Obligation requires broker-dealers to adopt policies and procedures that are reasonable designed to ensure compliance with REG BI.
An additional requirement under the reform package requires broker-dealers and investment advisers to deliver a relationship summary brochure (Form CRS) that succinctly outlines, among other things the firm’s services, fees, conflicts of interests, and any disciplinary history pertaining to the firm and/or its representatives. Form CRS, also called ADV Part 3, includes a standardized section that is designed to help retail investors compare different firms and types of services and will provide links to educational resources.
Challenges from Washington
Congresswoman Maxine Waters (D-California), Chair of the House Financial Services Committee does not believe the newly adopted regulations go far enough to protect investors, particularly seniors. Arguing that REG BI standards are weaker than the Department of Labor’s now-obsolete fiduciary rule, she has proposed legislation that would block the SEC from using government funds to enforce REG BI.
The House of Representatives is expected to vote on the proposed legislation soon, but even if it prevails in the House, it may not be upheld by the Republican-led Senate, which is supportive of the SEC’s reform package. Further, President Donald Trump has vowed to veto the legislation if it passes the Senate and reaches his desk.
Preparing for Compliance
Though delays and changes may be ahead for REG BI, Core Compliance and its team of experts encourages broker-dealer and investment advisory firms to focus on this new regulation now and not wait. Chief Compliance Officers and their teams should become educated and familiar with the requirements and applicable changes that will be required, along with the compliance deadlines because the disclosures and operational changes will be significant and preparation is key.
Utilizing a third-party consultant can help your Compliance team to determine specific challenges your firm may face in the implementation process and help you to efficiently enact a compliance plan.
Tune into our recent CCO Buzz Podcast episode #50 with Core Compliance President Tito Pombra on the regulations and his recommendations for firms to prepare for the required changes.
Core Compliance is available to answer questions and provide guidance and assist with developing strategies, policies, procedures and implementation schedules for your firm.