What Independent Broker-Dealers Need to Know and Do for Reg BI

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On June 5, 2019, the United States Securities and Exchange Commission (“Commission”) adopted Rule 15l-1 (“Regulation Best Interest” or Reg BI) under the Securities Exchange Act of 1934 (“Exchange Act”), which has a compliance date of June 30, 2020.1 Reg BI became effective September 10, 2019. Notwithstanding the host of issues arising from the global pandemic, an economic recession and significant market volatility across essentially every sector, the Commission has made clear that the deadline for compliance with Reg BI and the related Form CRS requirements will not be delayed or extended.

In broadest terms, Reg BI provides that when recommending a securities transaction or investment strategy to a retail customer2, including a mere account recommendation by an associated person of a broker-dealer to open an IRA or to roll over to an IRA (in other words, even in the absence of a specific securities recommendation), a broker-dealer, including its associated person, must act in the customer’s best interest by not putting its financial interests ahead of the interests of the customer when making a recommendation. Reg BI has four (4) component parts with which a broker-dealer must comply in order to satisfy this “best interest” standard: a (i) disclosure obligation; (ii) care obligation; (iii) conflict of interest obligation; and (iv) compliance obligation.

Furthermore, broker-dealers and Commission-registered investment advisers are now obligated to prepare and deliver a two-page, “question-and-answer” format relationship summary to potential, new retail customers as well as existing retail customers that, in one place, describes for the retail customer: “(i)the types of client and customer relationships and services the firm offers; (ii) the fees, costs, conflicts of interest, and required standard of conduct associated with those relationships and services; (iii) whether the firm and its professionals currently have reportable legal or disciplinary history; and (iv) how to obtain additional information about the firm.” Like the effective date of Reg BI, June 30, 2020 is also the compliance date by which broker-dealers must file their initial Forms CRS with the Commission.3 Broker-dealers have an additional thirty (30) days from that filing deadline to provide all existing retail customers with a copy of the initial Form CRS.4Thereafter, broker-dealers must post a current copy of their relationship summary on their firms’ websites, provide updates to existing customers within thirty (30) days of receiving a request from a retail customer and otherwise provide an updated Form CRS to all existing customers within sixty (60) days of any future update deadlines. In so doing, the Regulation places a continuing burden on broker-dealers to regularly provide their existing retail customers with sufficient information that the customers may require to determine, at any time, if they wish to continue their relationships with their broker-dealers.5

For many small and independent broker-dealers with limited time and resources, implementing and testing their supervisory policies and procedures remains a priority and a challenge despite the looming deadline. While broker-dealers must comply with all aspects of Reg BI, particular emphasis on broker-dealers’ duty of care to their customers; to recommend investments and strategies that are in the customers’ best interest and to consider reasonable alternatives and costs as part of that determination, remains at the core of supervisory procedures and practices. Furthermore, broker-dealers’ ability to demonstrate compliance with the new standard of conduct will be a priority for the Commission’s Office of Compliance Inspections and Examination (“OCIE”).6