In this article we are going to examine some of the requirements of Regulation Best Interest also known as Regulation BI or Reg BI.
Regulation Best Interest
Regulation Best Interest (Reg BI) was adopted by the SEC in June of 2019 as an amendment to The Securities Exchange Act of 1934. All broker dealers, investment advisers and agents are subject to standards of conduct that requires the firm and its agents to act in the best interest of retail customers. Regulation BI covers all recommendations to effect a securities transactions as well as all recommendations regarding account establishment. That is to say that when recommending that a client open a joint, transfer on death, trust or fee based account, the type of account established must be in the client’s best interest As part of Regulation Best Interest, all broker dealers and investment advisers will be required to provide retail clients with a client relationship summary (CRS) and will be required to post the CRS on their publicly available website. The CRS may be provided in hardcopy or electronically. If the CRS is provided in hardcopy, the CRS may not be more than 2 pages long and the CRS must be the first page among any documents sent in the same package. The following rules are in place relating to the CRS:
The CRS must be written in plain English using everyday terms
The CRS should be written using “active voice” with a strong, direct and clear meaning
The CRS must follow the standard format and order as detailed by The SEC
The CRS should be written as if speaking to the retail investor directly
The CRS must be factual and avoid boilerplate, vague or exaggerated language
The CRS may not include disclosures other than those required under Regulation BI
Electronic CRSs should use graphs and charts, specifically dual column charts to compare services
Electronic CRSs may use videos and popups and must provide access to any referenced information via hyperlink or other means
Electronic CRSs may be delivered via email provided that the email contains a direct link to the CRS
Some of the required disclosures are referred to as “conversation starters”. These conversation starters should be in bold or in other text to ensure that they are more noticeable than other disclosures. These conversation starters include questions such as:
1) Who is my primary contact and does he or she represent a broker dealer or an investment adviser?
2) Who can I speak to about how the person is treating me?
3) Given my financial situation should I choose a brokerage service, why or why not?
4) Given my financial situation should I choose an investment advisory service, why or why not?
5) How will you choose investments to recommend to me?
6) what is your relevant experience including licenses, education and qualifications? What do these qualifications mean?
6) What fees will I pay?
7) How will these fees affect my investments? If I give you $10,000 how much will go towards fees and expenses and how much will be invested for me?
8) What are your legal obligations to me when providing recommendations ( broker dealer )
9) What are your legal obligations to me when acting as my investment adviser ?
10) How else does your firm make money?
11) How do your financial professionals make money
11) What conflicts of interest do you have?
13) Does the firm or its financial professionals have legal or disciplinary history?
Both broker dealers and investment advisers are required to adhere to the standards of conduct under Regulation BI. As such both must disclose that they must put the interests of the client ahead of theirs when making a recommendation and that the way the firm makes money for providing the services causes a conflict of interest. These conflicts include recommending proprietary products, receiving payments from third parties, principal trading or revenue sharing.
Online broker dealers who only provide access to trading as well as investment advisors who only offer automated services and who do not offer access to specific registered individuals, must disclose this fact in the CRS and must provide a section on their website that answers questions relating to the conversation starters. If a broker dealer or investment advisor provides both online services and access to registered personnel a registered person must be made available to discuss the conversation starters.
Broker dealers are required to provide the CRS to customers before or upon the earlier of recommending the type of account to establish, an investment strategy or upon opening an account or placing an order. Investment advisers must provide the CRS to clients prior to or at the time the contract is entered into even if the contract is oral. The CRS is now known as ADV part 3. For entities who are registered as both a broker dealer and as an investment adviser, the CRS must be delivered upon the earliest requirement for either registration. Any changes required to be made to the CRS must be completed within 30 days and an updated CRS clearly reflecting the changes must be sent to existing customers within 60 days. All Broker dealers and investment advisers are required to file the CRS along with any changes with the SEC Broker dealers will file through the Central Registration Depository (CRD) system and investment advisors will file through Investment Adviser Registration Database (IARD). The relationship summary must be provided to a client upon request within 30 days.
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