It’s been about two years since a big change in our world. And, no, we aren’t talking about the pandemic (for once).
We’re talking about Regulation Best Interest and what it has meant for broker-dealers.
The Securities and Exchange Commission’s Regulation Best Interest (Reg BI) went into effect on June 30, 2020, and requires that broker-dealers act in the best interest of their customers when making a recommendation for any transactions or investment strategy.
Before Reg BI, firms only had to adhere to the “suitability standard,” meaning they only had to recommend investments that were suitable to their clients but not necessarily in their best interest. Neither the suitability standard nor Reg BI is the same as the fiduciary standard of care required for RIAs.
Along with the new “best interest” standard, Reg BI also included new disclosure, care, conflicts of interest, and compliance obligations.
So with Reg BI about to hit its second anniversary, what has it done to change the wealth management industry? Are firms getting dinged for compliance? What are the SEC and FINRA saying?
Let’s take a look at the current landscape through the lens of Reg BI.
First Reg BI Cases: Coming Soon?
It’s not unusual for the SEC or FINRA to give a grace period for firms to make adjustments to their compliance programs when new regulations go into effect. But it’s been two years now for Reg BI.
And so far this year the SEC already this year has charged 42 firms for failing to meet certain requirements for Form CRS, which is part of the compliance obligations of Reg BI.
FINRA hasn’t brought forth any Reg BI cases yet, but is using Reg BI to remind advisors of obligations with complex products, and recently sent a regulatory notice to broker-dealers regarding this.
The notice could be read as a warning to make sure broker-dealers are fulfilling their obligation to make sure their clients understand everything about the products available to them, especially through online trading platforms like Robinhood, and any products that include cryptocurrency futures.
These types of actions could be just the beginning of a ramp up, as investigations also typically take two years minimum. So the first big cases could come this year or maybe in 2023.
What Enforcement of Reg BI May Look Like
Reg BI is completely new and “best interest” is fairly vague, so the SEC could have as wide or narrow a view as it wants in enforcement.
However, as noted above, the SEC has already taken action against firms regarding not filing Form CRS correctly.
Enforcement, of course, will rely on how much broker-dealers have done to be in compliance. And, according to a 2021 report by the North American Securities Administrators Association, most firms “continue to operate precisely the same under Reg BI as they had under the suitability rule.” This likely points to quite a bit of enforcement by the SEC and FINRA on the horizon for large-scale change to take place.
When it does, what will it look like? In its February 2022 Report on FINRA’s Examinations and Risk Monitoring Program, FINRA provided some guidance on Reg BI compliance.
Top 10 Reg BI Compliance Issues
To simplify things, we broke that down into the following top 10 Reg BI compliance issues (and under which of the four obligations it falls under) your firm will want to shore up:
- Insufficient disclosures regarding the scope and terms of the relationship with customers and conflicts of interest associated with a recommendation (Disclosure Obligation)
- Firms are not also registered as investment advisors and associated persons who are not also supervised persons of an investment advisor appear to be using the title “advisor” (Disclosure Obligation)
- Making recommendations that are not in the best interest of a particular customer and recommending a series of transactions that are excessive for that customer’s investment profile (Care Obligation)
- Failure to perform reasonable diligence of offerings prior to recommending them to customers (Care Obligation)
- Failure to inquire into and analyze red flags identified during the reasonable diligence process (Care Obligation)
- Not identifying any conflicts of interest (Conflict of Interest Obligation)
- Identifying conflicts of interest but not addressing those conflicts (Conflict of Interest Obligation)
- Failing to have written supervisory procedures (WSPs) designed to achieve Reg BI compliance (Compliance Obligation)
- Failing to modify existing WSPs to reflect Reg BI’s obligations (Compliance Obligation)
- Failing to provide Reg BI training (Compliance Obligation)
Don’t Sleep on Reg BI
It’s in your firm’s best interest (see what we did there?) not to wait for the SEC or FINRA to come knocking.
If you’ve been a little lax with making sure you are compliant with Reg BI, don’t wait.
With consistent policies, procedures, and training for everyone across all locations (including all of those folks that may still be working from home), you can get Reg BI right, and Skience can help.
With Skience, a firm or advisor can use a guided workflow to generate the appropriate version of the disclosure form and then deliver the form electronically to the investor for review.
To meet the mandate that firms are required to maintain and preserve these disclosures in an easily-accessible place, Skience will store a record of delivery, including the date of distribution to the customer, securely within your firm’s CRM.
Learn by requesting a demo today!