On June 5, 2019, the Securities and Exchange Commission (SEC) adopted Regulation Best Interest (Reg BI) Rule 15I-1 under the Securities Exchange Act of 1934. Reg BI establishes a best interest standard of conduct for broker dealers when a recommendation is made to a retail customer of any securities transaction or investment strategy involving securities. The regulation became effective on Sept. 10, 2019, and requires compliance by June 30, 2020.
This regulation seeks to enhance the required standard of conduct to ensure broker dealers are acting in the best interest of the customer, ahead of their own interest. This overarching principle is referred to as the “general obligation.” In addition, there are provisions that require compliance with specific obligations, which set forth what it means to “act in the best interest.” The general obligation is satisfied only if the specific component obligations are satisfied.
The specific obligations are as follows:
Along with adopting Reg BI, the SEC concurrently adopted Form CRS. The Form CRS is essentially a relationship summary to provide information about the relationships and services the broker dealer offers, the associated fees and costs in addition to specified conflicts of interest and standards of conduct, including any disciplinary history. The form intends to summarize information in a standard format to allow for comparability across broker dealers. The relationship summary is identified as the initial level of disclosure while the Disclosure Obligation, as identified above, reflects additional layers of detail.
The SEC also amended Rules 17a-3 and 17a-4 of the Securities Exchange Act, which outline minimum requirements for record keeping and retention. Rule 17a-3 was amended to include new paragraph (a)(35) under the Securities Exchange Act, which requires broker dealers to record recommendations made to each retail customer, record all information collected from and provided to the customer pursuant to Reg BI, and to record the identity of each person responsible for the account. This new requirement provides a basis for broker dealers to evidence their compliance with Reg BI and for the SEC to examine such documentation. Rule 17a-4(e)(5) was also amended to require broker dealers to maintain and preserve records of the above noted items until at least six years after such record or relationship summary is created, and to record all dates that information was provided to retail customers.
To prepare for compliance with Reg BI, broker dealers should:
The Financial Industry Regulatory Authority (FINRA) has provided a Reg BI and Form CRS Checklist to assist members with their assessment of and impact to existing policies, procedures and compliance frameworks. For more information, refer to the SEC Release for Reg BI and SEC Release for Form CRS.
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