The SEC implemented Reg BI three years ago but some companies still aren't compliant. Here's what you need to know.
From the candy aisle at the grocery store to buy one, get one half off deals, every day we are inundated with options that encourage us to spend more so companies can make a larger profit. This might be acceptable when it comes to your weekly grocery run or online shopping, but a higher level of responsibility is expected with wealth management.
As trusted professionals, broker-deals have a duty to ensure they are acting in a client’s best interest. To ensure these efforts are being made, the Securities and Exchange Commission (SEC) created the Regulation Best Interest (Reg BI) rule.
This article will go over a high-level interpretation of Reg BI and is not legal advice. You are encouraged to read the full Reg BI rule and consult with your compliance and legal departments if needed.
Established under the Securities Exchange Act of 1984 and effective as of June 30, 2020, Reg BI is a rule that reinforces a broker-dealer's obligation to act in the best interest of a retail customer at the time the recommendation is made, without placing your own financial or other interests ahead of the retail customer’s interest.
To successfully comply with the rule, you must adhere to four specific components: Disclosure Obligation, Care Obligation, Conflict of Interest Obligation, and Compliance Obligation.
o 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.
o Care Obligation: exercise reasonable diligence, care, and skill in making the recommendation.
o Conflict of Interest Obligation: establish, maintain, and enforce written policies and procedures reasonably designed to address conflicts of interest.
o Compliance Obligation: establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest.
In addition to complying with the new obligations, increased record-making and recordkeeping responsibilities must be met. These include the need to keep a record of all information regarding Reg BI provided by and collected from a retail customer and to keep said information for at least six years after the account closes or the date on which the information was replaced or updated.
Reg BI also introduced a customer relationship summary required to deliver to retail customers: Form CRS. The summary must be easy for retail customers to understand and have a well-rounded view of the firm. It must include information such as the type of client relationships and services the firm offers, the fees associated with those relationships and services, and whether the company or its financial professionals have a reportable legal or disciplinary history.
Aside from the fact that it’s the right thing to do to ensure you are offering a trustworthy service to your clients, failure to comply with Reg BI will cost you—both literally and figuratively.
In June 2022, the SEC made its first action regarding Reg BI: a federal lawsuit against Western International Securities, Inc., a dual-registered broker-dealer and investment advisor, and five of its registered representatives, for failing to comply with obligations. News of the charges alleged, “between July 2020 and April 2021, Western and the brokers recommended and sold L Bonds to retail customers, many of whom were on fixed incomes and had moderate risk tolerances, despite the issuer, GWG Holdings, Inc., stating the L bonds were high risk, illiquid, and only suitable for customers with substantial financial resources.”
Financial Industry Regulatory Authority (FINRA) soon followed suit and numerous fines—ranging from $5,000 to upwards of $75,000—and suspensions have been given out in 2023.
In addition to fines, inefficient and inconsistent compliance processes have an opportunity cost. Without a consistent compliance procedure, your firm may be spending unnecessary time on Reg BI administrative work—time that would be better spent building stronger relationships with your clients and growing your business.
Given building client trust and confidence is imperative to the wealth management experience. You need to maximize face time with clients, and you don’t want your firm’s name in a headline that says you don’t operate in a client’s best interest.
In January 2023, the SEC released a Risk Alert, with several deficiencies and weak practices they found when the Division of Examinations started conducting broker-dealer examinations to assess compliance with Regulation Best Interest. It shared many areas of improvement that your firm should consider when reviewing your processes and policies.
Notably, the alert said that firms “relied heavily on surveillance systems that existed before the effective date of Regulation Best Interest without considering whether those systems needed modification in order to effectively monitor for compliance with Regulation Best Interest.”
To best ensure your firm adheres to Reg BI obligations, you don’t need to add more work to your plate. Rather, you need a consistent process built out for your entire team with the rule in mind and with the proper compliance guardrails in place.
CapIntel is an investment proposal and sales enablement tool created to seamlessly integrate into your workday. It includes guardrails in place that help wealth management professionals acknowledge the disclosure, care, conflict of interest, compliance, and record-making and keeping obligations. The standardized platform offers broker-dealers a consistent way for their financial advisors to create investment presentations in a controlled, timestamped, and recorded environment. It cannot control someone’s actions, but there are structures in place to acknowledge and steer professionals into a workflow that is Reg BI compliant.
Reg BI was created with the best interest of retail customers in mind, but it can also be used as a powerful way to ensure your firm maintains best-in-class standards and services. It may seem like additional work, but the right technology can provide seamless tools to embed the necessary obligations into your workday.