Regulation Best Interest (Reg BI) & Form CRS
The Securities and Exchange Commission adopted Regulation Best Interest (Reg BI) in order to create a best interest standard of conduct for Broker Dealers and their representatives who provide securities or investment recommendations to retail investors, and provides additional disclosure mandates for Investment Advisers. These rules were implemented to improve the relationship between Broker Dealers and their clients, including quality of communication and transparency regarding products, services, fees and conflicts of interest. Reg BI has four components: Care, Disclosure, Conflict of Interest and Compliance; and requires that any recommendations be made in the client’s “best interest” and with “care.” In addition, firms are required to mitigate conflicts of interest and implement new and rigorous compliance procedures and policies that are specifically designed and written to comply with Reg BI. Finally, Reg BI mandates new disclosure requirements for both Broker Dealers and Investment Advisers.
Reg BI Requires Firms File Form CRS
Reg BI requires firms to file with regulators and provide to clients a Customer Relationship Summary or Form CRS, and that all information contained therein be true and correct and not omit any material facts or information that may mislead investors. The information must give retail investors a balanced and fair view of the Broker Dealer and Investment Adviser services provided and applicable fees and conflicts of interests, rather than vague, boilerplate and generic descriptions. Form CRS must be written in language easily understandable to the average investor and carries strict requirements and page limits.
How Reg BI Impacts Broker Dealers
Broker Dealers are required to follow additional federal and state rules of reporting and disclosure as well, including the Exchange Act, and the rules of self-regulatory organizations. Submission of a Customer Relationship Summary does not in and of itself constitute compliance with these federal and state securities laws and regulations. Broker Dealers are required to file Form CRS with the SEC and FINRA as soon as they begin offering services to retail investors, regardless of whether they make recommendations and post the current version of the relationship summary prominently on their public website, if they have one in a location and format that is easily accessible for retail investors. If the relationship summary is posted on a Broker Dealer’s website or obtainable electronically, then the Broker Dealer must provide access to the relationship summary regulatory disclosures. Broker Dealers that are dually registered as Investment Advisers must comply with the provisions of Form CRS which apply to these entities and may opt to file and provide a consolidated Form CRS or separate relationship summaries for each entity. This requirement includes the narrative brochure from Part 2A of Form ADV, conflicts disclosures, and fee schedules.
Filing Requirements for Broker Dealers
As part of the filing requirements, a relationship summary must be filed with the SEC and FINRA within 30 days of whenever any information in the relationship summary becomes materially inaccurate. The relationship summary must also be provided to the client upon opening a new account, recommending a rollover of assets from a retirement account, or when a new type of brokerage service is offered. The Broker Dealer is required to communicate any changes to the relationship summary with the client within 60 days after the updates and may not charge the clients for updates. The relationship summary must show the revised changes by highlighting or including a summary of material changes.
When Must Broker Dealers and Investment Advisers Deliver a Relationship Summary to Each Retail Investor?
Broker Dealers are required to provide each retail investor a relationship summary before (or at the earliest of):
(a) a recommendation of an account type, securities transaction or investment strategy involving securities
(b) placing an order for a retail investor
(c) opening a brokerage account for a retail investor
Investment Advisers are required to provide each retail investor a relationship summary before or at the time when they enter into an investment advisory contract with a retail investor.
Broker Dealers and Investment Advisers Providing Services to Retail Investors Must File Form ADV, Part 3 (Form CRS)
● Registered Broker Dealers who are required to deliver a relationship summary, must file Form CRS electronically through the Central Registration Depository, managed by FINRA
● Investment Advisers who are required to deliver a relationship summary, must file electronically with the Investment Adviser Registration Depository (IARD).
WSP Checklist – Written Supervisory Procedures
One of the major requirements of Reg BI? Requiring firms to have revised policies and procedures in place designed to specifically comply with Reg BI. FINRA Rule 3110 requires every member to establish, maintain and enforce written procedures to supervise business areas they engage in, as well as supervising the activities of their registered representatives, in order to achieve regulatory compliance with FINRA and SEC applicable rules, regulations and securities laws. Therefore, firm’s will be required to update their Written Supervisory Procedures or they risk being cited.
Important Note: Both the SEC and FINRA examiners have said when conducting their firm exams, Form CRS is the first document they will request and use as a roadmap for the examiners!
Reg BI Implications for Broker Dealers
The SEC adopted Regulation Best Interest (Reg BI) to create a best interest standard of conduct for Broker Dealers and their representatives who provide securities or investment recommendations to retail investors, as well as additional disclosure mandates for Investment Advisers. Broker Dealers and Investment Advisers must conform to these standards or face penalties. Following Reg BI requirements does not give Broker Dealers a pass for other federal and state rules and regulations. These regulations are complex and continue to change each year, and investment firms are required to stay up to date with these changes.
Outsource Compliance to Meet Complex Regulatory Requirements
Compliance Exchange Group helps Broker Dealers and Investment Advisers meet complex regulatory requirements, including SEC and FINRA regulations. CXG helps firms achieve compliance by providing outsourced personnel including FinOps, CCO’s, CFO’s and other principals. We also help firms buy, sell, or start a broker dealer or investment firm; including all filings and FINRA communication.
Learn How CXG Can Help You with Reg BI & Form CRS
If you would like to learn more about Reg BI, Form CRS, or CXG’s FINRA and SEC compliance consulting services, please contact us anytime. We are always happy to discuss your firm’s needs and goals with you. Visit http://www.cxgllc.com or call 631-595-5305.