Reg BI: What Is It, and Why Should You Care?

14
Sep

Reg BI: What Is It, and Why Should You Care?

On June 30, 2020, Regulation Best Interest, or Reg BI for short, officially went into effect. But what is Reg BI, exactly? Where did it come from, and how does it impact you, the investor? Here’s what to know about the new rule under the Securities and Exchange Commission (SEC).

What is Reg BI?

Reg BI provides a clear set of standards for financial professionals and broker-dealer conduct. These standards include disclosure of conflicts of interest and require that all investments made on the client’s behalf are in that client’s best interest – and not in the financial best interest of the financial professional or broker-dealer. In addition to comply with these standards, financial professionals must provide documentation that explains why a recommended product is suitable for clients based on their needs, risk tolerance, and objectives.

Where did Reg BI originate?

However, in July 2012, the Financial Industry Regulatory Authority (FINRA), conducted reviews at several financial firms to learn about their internal procedures to identify and manage conflicts of interest. Based on their findings, FINRA published the Report on Conflicts of Interest on Oct. 14, 2013, and concluded that financial firms needed to do more to manage and mitigate conflicts of interest among their employees, including:

  • Outside business activities
  • Political and charitable contributions
  • Gifts and entertainment
  • Confidentiality

For a full summary of conflicts of interest identified by financial firms, see page 41 of the report.

Fast forward to June 5, 2019, when the Securities and Exchange Commission (SEC) approved Reg BI to “enhance and clarify the standards of conduct applicable to broker-dealers and investment advisors.”1

What Reg BI means for investors. 

As a result of Reg BI, you can expect to receive relationship summary documentation (Form CRS)—either in the mail or electronically— from your broker-dealer or financial professional with the following information:

  • Service information, including fees and costs.
  • Potential conflicts of interest.
  • Disclosures related to the products they sell and recommend to you.
  • Information regarding any disciplinary history of the firm and its financial professionals.

Above all, this information may seem like a no-brainer to you. After all, isn’t your financial professional already required to make investment decisions with your best interest in mind? However, before Reg BI, the guidelines just weren’t clear. Reg BI improves the client-financial professional relationship’s transparency. So that you have greater insight into your financial professional’s investment recommendations and background information. To learn more about Reg BI, visit the FINRA resource page.

1 SEC, Press Release, June 5, 2019, SEC Adopts Rules and interpretations to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Financial Professionals.

Disclosure

This newsletter is being provided as a service to you. Please note that the information and opinions included are provided by third parties and have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. Financial Professionals should ensure they continue to follow the current policies on the use of any advertising, third-party materials, and/or social media as required by your broker/dealer and/or the carriers that you represent.

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