Deadline Looms for Regulation Best Interest…What Now?

The deadline for broker-dealers to comply with the new SEC rule is June 30, 2020.

Regulation Best Interest (Reg BI) is real, it’s coming, and don’t hold your breath for an extension. If you haven’t prepared for the new SEC rule which goes into effect this year, it’s time to get started.

We all remember in 2016, the Department of Labor attempted to address discrepancies between financial professionals’ standards of care by passing the “Fiduciary Rule,” which was ultimately vacated by the Fifth Circuit Court of Appeals in 2018. Consequently, when Reg BI began facing legal challenges earlier this year, many firms were not eager to jump on implementation believing it would suffer the same fate. However, we must remember regulatory legal challenges are not rare. When addressing expectations for investment firms’ implementation of Reg BI, SEC Chairman Jay Clayton made clear “when it’s the law [June, 30 2020], we’ll inspect against it.”

Are you ready for Reg BI?

While the rule was created by the SEC, FINRA will be primarily responsible for examining broker-dealers’ compliance with Reg BI. FINRA also appears to be discouraging firms from waiting until the last minute. In November 2019, the agency announced the commencement of Reg BI “Preparedness Exams.”. FINRA hopes it will be able to gauge readiness and mitigate issues prior to the June 2020 deadline – a clear indication that it expects firms to be ready to comply by this date. FINRA has also included Reg BI as a key area of review in its 2020 Examination Priorities Letter.

For firms still waiting to get started, we encourage you to review the rule and understand what lies ahead in terms of its implementation. Although compliance will entail a significant investment from firms, SEC Commissioner Roisman stated with respect to the time and cost, “…while I have considered that the costs involved may be high, I believe that they are justified by the resulting benefits.”

To get you started, below is a high-level overview of what is included in the 770+ page release.

Reg BI overview

Reg BI was born out of Section 913 of Dodd Frank requiring the SEC to study and consider multiple changes to the current regulatory framework, including potential enhancements to the broker-dealer suitability standard.

Passed in June of 2019, Reg BI requires broker-dealers to act in the best interest of retail customers at the time of a recommendation. More broadly, this general obligation is satisfied only if you comply with four specific obligations:

• Disclosure Obligation: provide certain required disclosures before or at the time of the recommendation;
• Care Obligation: exercise reasonable diligence, care, and skill in making the recommendation;
• Conflict of Interest Obligation: establish, maintain, and enforce written policies and procedures reasonably designed to address conflicts of interest; and
• Compliance Obligation: establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Regulation Best Interest.

In addition to the requirements above, firms will be required to draft and submit a 2-page (4-page for dually-registered firms) Customer Relationship Summary (Form CRS) and deliver this document to prospective retail customers during or prior to the recommendation of an account type, security/product, or an investment strategy. Investment advisers must deliver the Form CRS before or at the time the firm enters into an investment advisory contract with the retail investor, even if the agreement is oral.

Next steps for Reg BI/Form CRS compliance

Remember, every firm is different, and the conflicts, disclosures, and overall implementation will be too. So be cautious of trying to utilize a template approach. Start with understanding your firm’s conflicts, disclosures and remember the SEC has made clear the Form CRS alone will not satisfy these obligations. FINRA’s Reg BI and Form CRS Checklist is a great place to start, but understand the additional nuances to the rule which require careful consideration, including account monitoring, account type recommendations, challenges with dually registered individuals/firms, updated books and records requirements and changes to what defines a “retail customer.”

Kaufman Rossin has carefully examined the Regulation Best Interest and Form CRS rules and has created a turn-key implementation solution to help firms comply with the new standard and expectations. Contact me or another member of our risk advisory services team to learn more about how we can help your firm comply with Reg BI.