Reg BI, short for Regulation Best Interest, was implemented by the SEC in 2019. FINRA enforces the rule. However, once again, Reg BI is at the center of discussion.

Many parts of the rule, including precisely what best interests’ means, are a bit vague. The rule attempts to define a level of care. that advisors working under the auspices of a broker-dealer or as RIAs, must adhere to in dealing with their clients. 

Reg BI is an attempt to replace the DOL’s fiduciary rule implemented during the Obama administration but shelved under the Trump administration. Reg BI is not a replacement but does hold brokers especially to an elevated standard of care.

Disclosing information about investment recommendations. 

Brokers must disclose to clients the reason why they are recommending a particular investment product to them. This disclosure also applies to any change in the investment strategy they recommend to the client, which must be disclosed before implementing any changes.  

Exercising diligence and individuality of care.

Brokers need to document why they feel that a particular strategy is suitable for their client; this goes beyond the old suitability standard. The course of action must fit the specific client, not just someone generically with similar circumstances.

Disclosing conflicts of interest.

A key aspect of Reg BI surrounds conflicts of interest that the broker or advisor may have in recommending an investment to a client. This conflict could be compensation received from recommending the specific investment product or others. All potential conflicts of interest must be disclosed to the client, creating another level of compliance protocol.

Why Form CRS?

Both brokers and RIAs are required to complete a client relationship summary form. The CRS summarizes the relationship between the advisor and the client in terms of:

  • The types of client and broker/advisor relationship the firm offers. 
  • Disclosing any conflicts of interest the firm may have. 
  • The firm’s plan to meet the required standards of care required by Reg BI.
  • Any disciplinary or legal history of the firm or any of the financial professionals in the firm. 

Completing form CRS and providing it to the client is required before or any time any financial advice is presented to them. 

What does this mean for advisory firms?

All advisory firms, especially those who work all or in part as broker-dealer, must align their internal compliance functions to ensure they are meeting the requirements of Reg BI. This alignment must extend beyond the firm level to include training each advisor within the firm, helping to ensure that all client recommendations comply with Reg BI. 

For RIAs covered by a fiduciary standard through SEC registration, Reg BI rules might be second nature. However, it still makes sense to conduct a compliance review to ensure your firm’s processes meet Reg BI’s rules.