Regulation Best Interest: Understanding the Obligations

We have been conducting roundtables and talking to industry leaders to help them identify the challenges that broker-dealers will face in implementing Regulation Best Interest, or Reg BI for short. In upcoming posts, we will provide further insight into developing a Reg BI plan.

Reg BI, applies to broker-dealers that service natural person clients and raises the standard of care by imposing a “General Obligation” to act in a retail client’s best interest and to not place its own interest ahead of its retail client. The General Obligation is satisfied only if the broker-dealer complies with four specific component obligations. Compliance with Reg BI is required by June 30, 2020.

The four component obligations define what it means to “act in the best interest” and are outlined as follows:

Disclosure Obligation

Provide certain prescribed disclosure before or at the time of the recommendations, about the recommendation and the relationship between the retail customer and the broker-dealer.  Such disclosures must address all material facts relating to the scope and terms of the relationship with the retail customer, including capacity as a broker-dealer, material fees and costs, and type and scope of services.

 

Care Obligation

Exercise reasonable diligence, care and skill in making a recommendation to understand the associated potential risks rewards and costs, have a reasonable basis to believe the recommendation is in the best interest of the customer and have a reasonable basis to believe that a series of recommended transactions is not excessive.

 

 

Conflicts of Interest Obligation

Establish, maintain and enforce policies and procedures reasonably designed to address conflicts of interest associated with its recommendations to retail customers.

Addressing the conflict of interest obligation requires broker-dealers to identify and at a minimum disclose or eliminate, all conflicts of interest associated with such recommendations and to mitigate certain identified conflicts, assuming that those conflicts were not otherwise eliminated.

Compliance Obligation

Establish, maintain and enforce policies and procedures reasonably designed to achieve compliance with Reg BI.  The SEC believes that a broker-dealer “should consider the nature of that firm’s operations and how to design such policies and procedures to prevent violations from occurring, detect violations that have occurred, and to correct promptly any violations that have occurred.”

 

In preparing for Reg BI, broker-dealers must conduct a comprehensive review of their business and client disclosures, including the development of new Form CRS. Key considerations include:

  • Form CRS and other client disclosures
  • Conflicts of Interest
  • Product offerings
  • Conflicting lines of business
  • Investment recommendations
  • Compensation systems
  • Supervision
  • Training

If you need more help on Form CRS, visit our Ultimate Guide to Form CRS page, with information about the regulation, as well as our solution.


Subscribe to CSS Blog

CSS frequently publishes blog posts which are written by our team from their observations in the field, at conferences and through experiences with compliance professionals. These posts are designed to further knowledge and share industry best practices. Topics run the gamut, including Form ADV, cybersecurity, MiFID II, position limit monitoring, technology challenges and more. Complete and submit the brief form below to receive notifications when we publish new content.

Latest Content

Texas Outlaws and a Silver Bullet: Position Limits in the USA

In this first installment on position limits, Regulatory Guidance expert Greg Hotaling surveys the current landscape of position limits imposed for U.S.-listed commodity derivative holdings, which can affect investment firms and other speculative investors regardless of where they are based. Stay tuned for coverage of EU position limits in the next edition. “Who shot J.R.?!” … Continued

FAQs From the Cyber Desk

Cybersecurity is a fast-moving target, so it is not uncommon for firms to have questions when it comes to assessing and understanding their cybersecurity risks. Here at CSS we receive a lot of cybersecurity questions, so we thought we would take the time to answer 10 of the most common Frequently Asked Questions. (1) What … Continued

EU Position Limits: Born in the USA?

This is the second installment of Regulatory Guidance Expert Greg Hotaling’s blog on position limits, this time addressing EU-listed commodity derivatives and related products.  As always, keep in mind that these limits can apply to asset managers, and other market participants, regardless of where they are based. In 2009, the European Union’s first comprehensive position … Continued