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

CSS, through its Ascendant compliance services division, has developed a full-service solution for broker-dealers in meeting their Reg BI and Form CRS needs. For more information, please contact us.


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.

Loading form...

Latest Content

Proposed Amendments to Transaction Cost Calculations under PRIIPs

The European Supervisory Authorities (ESAs) recently issued a consultation paper that includes two draft proposals for changes to transaction cost calculation requirements outlined in Annex VI points 7-23, among other proposed amendments to the PRIIPs KID. The first proposal seeks to reduce the impact of negative implicit costs on net transaction cost disclosures, in addition … Continued

Introducing the Regulatory Book of Record (RBOR)

I recently had the opportunity to sit down with our Chief Product Officer Ronan Brennan to discuss regulatory data management in front of an intimate and engaged audience of CSS conference attendees in Scottsdale, Arizona. The group ranged from small fund managers to large institutional asset managers, so it was difficult to boil down the … Continued