Are You Ready For SEC Regulation BI? It's in your "Best Interest" to Comply
The securities industry is all about full disclosure. How, what, why and when does a financial professional service their clients? This answers to these questions can become difficult to answer, especially when the financial professional has multiple ways and means, to service an account. For example, is the financial professional acting as an investment adviser for a Registered Investment Adviser ("RIA"), or as a registered representative of a Broker/Dealer ("B/D")?
Government agencies, like the Securities and Exchange Commission ("SEC"), and the Department of Labor ("DOL"), as well as, regulatory bodies, such as FINRA and NASAA, have also grappled with answering these questions. Recently, the DOL proposed enacting the "Fiduciary Rule," which would have imposed the fiduciary standard on many heretofore non fiduciary investment professionals. The numerous problems this would have created, caused an immediate backlash among industry participants, and ultimately this proposal was squashed.
But still the questions remained. Clearly some standardization of roles in the financial industry were needed. So the SEC to a slightly different approach and recently passed Regulation Best Interest ("Reg BI"). Reg BI enhances and defines activities, while still leaving industry standards, such as suitability and eliminating conflicts of interest, in place.
So what does Reg BI ask financial professionals to do? The initial answer is straightforward and simple. Reg BI is a new standard of conduct that requires those persons in the securities industry to put their customer's interests ahead of theirs, regarding financial profits, or any other type of gain, they may realize.
The Best Interest Obligation simply stated is this:
"A broker, dealer, or a natural person who is an associated person of a broker or dealer, when making a recommendation of any securities transaction, or investment strategy involving securities to a retail customer, shall act in the best interest of the retail customer at the time the recommendation is made, without placing the financial, or other interest of the broker, dealer, or natural person who is an associated person of a broker, or dealer making the recommendation ahead of the interest of the retail customer."
Transparency and disclosure were seen as critical to the successful implementation of the rule. Reg BI requires all B/Ds and RIAs to give their clients a brief Client Relationship Summary Form ("Form CRS"). Form CRS needs to describe, in plain English, all of the firm's services and the various relationships it may have with its customers, including all the types of accounts it may offer. The fees and costs that a customer would have, also need to be addressed in Form CRS.
The extensive disclosures required by the rule, will give investors insights into a company's style of investment advice, and also gives additional consideration into disclosing potential and, or material conflicts of interest. The conflict of interest consideration puts an end to sales contests, sales quotas, bonuses based on sales and any non cash compensation that is based upon the sale of specific securities in a specific time period.
Reg BI also attempts to define the role that the financial professional plays. While the DOL Rule strived to define all financial professionals as fiduciaries, which is a very high standard, Reg BI defers on this point. B/Ds can still rely on the "incidental rule" whereby they can render financial advice to customers, as long as it is incidental to their main business of selling securities. However B/Ds are not permitted to use "adviser" in their name when communicating with their customers. The SEC should be issuing interpretations to clear any confusion up, in the future.
Although the DOL Rule had a polarizing effect on industry participants, Reg BI seems to be gathering positive consensus. Reg BI is complicated and the ensuing regulations and interpretations, will not make it any less though. But there is simplicity at the heart of it all. Think of it as a professional "Golden Rule" and treat your customers as you yourself would want to be treated. That is the essence of Reg BI, to put your customers interests BEFORE those of your own.
If you need any assistance in implementing Reg BI, or want to develop a Form CRS, please give us a call at (407) 696-9600.