This regulation will affect how broker/dealer firms, and their financial professionals, work with clients. It creates a higher standard of conduct than the existing "suitability" requirement. And, unlike the DOL Rule, it applies to all investment recommendations, not just those involving qualified plans and IRAs.
Let’s look at what we currently know about Reg BI. (When the term "firm" is used, it means the broker/dealer firm, AND its financial professionals. The term "clients" means the retail investors.)
And remember: The best source for information about what Reg BI will mean to your daily business is your broker/dealer and/or RIA firm.
Reg BI describes the way firms will work with clients going forward. It requires that the broker/dealer firm always act in the "best interest" of the client. This new standard is higher than the existing suitability standard. Reg BI applies to recommendations of security transactions or any investment strategies involving securities. This regulation also applies to "recommendations to hold" if account monitoring is offered.
"Best Interest" is expressly not defined. That being said, SEC Chairman Jay Clayton has stated that the "standard of conduct draws from many key fiduciary principles," which reaffirms that Reg BI intends to support a higher standard of care.
Reg BI creates the Best Interest Obligation, which has four parts. The focus of Reg BI is disclosure: clients must have all the information needed, including information about any conflicts of interest. Nevertheless, all four core obligations must be met.
Firms must disclose material facts about the relationship they have with the client and about any recommendations made. What must be disclosed includes:
• Capacity in which the firm is acting, for example, as a "broker" versus as an "investment adviser."
• Any fees.
• What services are provided, including any limits on those services.
• Any conflicts the firm has, for example, whether it is in the interest of the firm to recommend one product or strategy over another.
• Whether or not monitoring is provided.
Firms must "exercise reasonable diligence, care and skill when making a recommendation to the client." This means the financial professional must understand the risks and rewards of the recommendation, as well as its costs, for each client. This must be before making any recommendation.
Conflict of Interest Obligation
Firms must mitigate or manage financial conflicts. This affects incentives that might cause a recommendation that is not in the client’s best interest, but could be in the financial best interest of the firm. If the incentives involve specific securities, or specific types of securities, this eliminates sales-based contests, quotas, bonuses, and certain forms of noncash compensation.
As expected, the final rule places a requirement for firms to "establish, maintain and enforce policies and procedures reasonably designed to achieve compliance" with Reg BI.
Reg BI expressly applies to "account recommendations." It applies to a recommendation to open a specific type of investment account, for example, whether to open a brokerage account or advisory account. Reg BI specifically includes the decision to roll assets from an employer plan to an IRA.
The Form CRS Relationship Summary is the separate Reg BI "user friendly" piece to share with clients and prospective clients explaining the relationship between the firm and the retail investor. It is a Q&A format, and includes the disclosures, as well as the legal standard (acting as a broker versus acting as an investment adviser), of the relationship between the firm and the retail client. The length is limited to two pages, unless the firm is a dual registrant, where the limit will be four pages.
Additionally, the firm must disclose whether the firm, and its financial professionals, have any disciplinary history. And it must highlight the SEC’s educational website at www.Investor.gov.
RIAs also will be required to deliver Form CRS to clients (see above). The SEC also reaffirmed, and clarified, the fiduciary duty owed to clients under the Investment Advisers Act of 1940.
Reg BI and Form CRS go into effect 60 days after publication in the Federal Register. The Reg BI obligation will not be enforced until June 30, 2020, although firms may choose to adopt the processes earlier. Interpretations in the rule go into effect at publication.
Good question. The best option for good information is to check with your broker/dealer firm for updates and to learn how it plans to support you as Reg BI goes forward.
For additional information on Reg BI, feel welcome to contact the Retirement Strategies Group at (800) 722-2333, extension 3939, or email us at RSG@PacificLife.com. Or check the links below.
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