What may be suitable for your clients may not always be in their best interest…Or is it?

The SEC adopted Regulation Best Interest, better known as Reg BI, in June 2019 to take the place of the suitability standard. The new rule went into effect during the early months of the COVID-19 pandemic on June 30, 2020. We are now more than two years into the reign of Reg BI as the new standard of conduct for broker-dealers and advisors.

How has the wealth management landscape shifted today because of Reg BI? Is the first round of big violations on the horizon? Has Reg BI caused industry changes? And maybe most relevant for you – what do you need to do to stay compliant? 

Regulatory BI refresher

Reg BI established a new standard of conduct for broker-dealers and independent financial advisors when making a recommendation of any securities transaction or investment strategy involving securities — including account recommendations — to a retail customer. 

The disclosure of the best interest information to the client is required through a Client Relationship Summary — Form CRS for broker-dealers and Form ADV Part 3 for advisors. The form includes information related to the scope, terms, potential conflicts of interest, and any disciplinary history. The form must be provided at four different points:

  • The start of any new client relationship or recommendation
  • When there is a change to any account
  • When any disclosures within your Form CRS change
  • Upon request

What’s changed since Reg BI implementation? 

Prior to Reg BI, firms and advisors only had to follow the suitability standard, which meant they only had to recommend investments that were suitable to their clients but not necessarily in their best interest. Now with Reg BI, the firm or advisor must demonstrate that they are acting in the best interest of the client.

It’s important to note, though, that many say the suitability standard nor Reg BI is the same as the fiduciary standard required for RIAs. Essentially, the regulation and disclosure form are meant to safeguard the interest of the investor. instead of what might be more important to a broker. For instance, it’s possible a broker may want to maximize their commission, but clients want the best return on their investment regardless of that.

Even with the new standards, there are indications that actual change has been slow:

  • A report released in November 2021 by the North American Securities Administrators Association found most brokers are not following Reg BI
  • The survey said that most brokers continued to have conflicts of interest related to the sales of “complex, costly, and risky products” that often provide higher compensation for brokers

However, there haven’t been any large regulation enforcement cases yet. So far, the SEC has mostly focused on fining firms for either failing to file their Form CRS at all or for failing to meet certain requirements for Form CRS. The SEC and FINRA typically give a grace period after new regulations go into effect to allow firms to adjust their compliance programs before ramping up enforcement.

Stay compliant with Reg BI

With the end of the unofficial grace period and the head of the SEC’s Division of Exams saying that Reg BI will be a top priority for 2023 exams, firms must ensure their compliance programs are following Reg BI and correctly using and filing Form CRS. “Best interest” might be a vague term that can be interpreted many different ways, but here are three of the more common violations that you should pay particular attention to:

  • Failure to recognize that Reg BI and Form CRS apply in a given situation
  • Incorrectly answering the disciplinary history question on Form CRS
  • Making no efforts to correct findings when previously cited

Enforcement could simply rely on how much a broker has done to be compliant. So simply documenting all of the steps that have been taken to further your Reg BI and Form CRS compliance could make all of the difference.

Streamline Reg BI compliance

Skience’s integration with RightBRIDGE allows firms to easily streamline Reg BI into their workflow process. With a click of a button, advisors can harness RightBRIDGE’s scoring engine and ReasonText™ to determine the best interest status of proposed rollovers, account types, and products, as well as an explanation why a recommendation fits a client’s needs and the firm’s Reg BI requirements. The data is then stored within Skience, which also conducts suitability checks. 

In addition, Skience automates the documentation and delivery of the required disclosure forms. A firm or advisor can use a simple, guided workflow to generate the appropriate version of the form and then deliver the form electronically to the investor to review. If an investor prefers a printed copy, advisors can print the form within Skience, and a record of delivery is stored.

How Skience can help

Protecting your data is essential to your advisory business, so be sure to choose tech partners who value your data as much as you do. Skience offers a full slate of solutions to keep your data not only secure and compliant but also accurate, easily accessible, and dynamically capable of providing a 360-degree view of accounts and insights into your business. Schedule a demo with us today!