As we anticipated in our April newsletter, the SEC commission ruled 3-1 to enact the new best interest policy on June 5. The Regulation Best Interest will implement a new package of rulemaking to enhance transparency between broker-dealers and investment advisors to end clients, including what services are being provided and compensation for each.
What Is Regulation Best Interest (Reg BI)?
There are three main areas this regulation is intended to address:
1) Enhance investor protections while preserving investors’ access and choice
2) Clarify what services you are providing
3) Identify how you are paid for these services
To achieve these things, there will be substantially enhanced suitability requirements for broker-dealers starting June 30, 2020. While these requirements will not be as arduous as those proposed under the former DOL fiduciary rule, the SEC has identified the following obligations:
- Disclosure obligation: The broker-dealer must disclose material facts about the relationship and recommendations including specific disclosures about the capacity in which the broker is acting, fees, the type and scope of services provided, conflicts, limitations on services and products, and whether the broker-dealer provides monitoring services.
- Care obligation: The broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to identify and at a minimum disclose or eliminate conflicts of interest (as investment advisors have been held previously).
- Conflict of Interest Obligation: The broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to identify and at a minimum disclose or eliminate conflicts of interest. This includes eliminating sales contests, sales quotas, bonuses, and non-cash compensation.
- Compliance Obligation: Broker-dealers must establish, maintain and enforce policies and procedures reasonably designed to achieve compliance with Regulation Best Interest as a whole.
How This Impacts Beacon Advisors
Stand-alone IAs or RIAS will not be impacted under this new rule as they have already been meeting these standards; however, advisors operating under multiple hats, such as dually-licensed registered reps/investment advisors, will now have to disclose any potential conflicts as they act in these different capacities to meet these four areas of obligation.
Form CRS Relationship Summary
Reg BI also introduced a new annual form filing for RIAs and BDs intended to provide retail investors with a simple, easy-to-understand and uniform document that summarizes the nature of the relationship, including:
- Conflicts of interest
- Legal standard of conduct
- Disciplinary history
Starting June 30, 2020, this form must be provided at the beginning of an investment relationship to new clients and annually alongside privacy policies, ADVs and access to prospectuses. Existing clients will need to receive Form CRS within 30 days from the date it is filed online. This content is not much different from what is currently on Form ADV 2A, but the SEC indicated that the goal for Form CRS is to provide this information in a standardized way to make it easier for retail investors to compare investment advisors and broker-dealers.
There have been some attempts from the House of Representatives to block this ruling; however, we don’t see any changes or an overturn being likely at this point. Regardless, at Beacon we advise all advisors to proceed with making preparations for Reg BI to go into effect next summer. Meeting the obligations outlined above as well as delivering Form CRS will be checklist items regulators will be looking for and enforcing.
For questions or additional resources on how to prepare your business for Reg BI, contact your wholesaler today!