Studies

Reg BI – How wealth management firms are implementing the Rule Package

Summary

SIFMA with Deloitte & Touche LLP conducted a survey on Regulation Best Interest to understand the implementation challenges, anticipated business, operating model, and technology changes, resource allocation, and time and cost commitments expected by SIFMA member firms in implementing the Reg BI Rule Package.

48 SIFMA member firms that provide financial advice and related services to retail customers, participated in the survey. The survey was closed on December 2, 2019, and responses are as of this date. Deloitte & Touche analyzed survey participants’ responses, which were provided on an anonymized basis, to identify the compliance decisions and requirements that Firms will likely need to implement to operationalize the Reg BI Rule Package. The aforementioned analysis has been summarized in the contents of this report.

Background

On June 5, 2019, the U.S. Securities and Exchange Commission (SEC) adopted new Regulation Best Interest (Reg BI) under the Securities Exchange Act of 1934. (2) Reg BI imposes principles‐based standards on recommendations to retail customers (3,4), requiring that broker‐dealers and their natural associated persons, among other things, act in “the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker‐dealer ahead of the interests of the retail customer.”(5)

To meet their best interest obligations, broker‐dealers that provide investment recommendations to their retail customers must also adhere to the following four component obligations: Disclosure Obligation, Care Obligation, Conflict of Interest (COI) Obligation, and Compliance Obligation.

Reg BI aims to provide retail customers with full and fair disclosure about the products and services offered by broker‐dealers, including relevant COIs, to allow these customers to make appropriate investment decisions pertinent to their investment goals and needs while understanding the associated risks with such decisions.(6) Additionally, each broker dealer and registered investment adviser must file a Customer Relationship Summary Form (Form CRS) with the SEC and provide a copy to each retail investor.(7) In two pages or less (or four pages or less in the case of dual registrants),(8) Form CRS must summarize the Registrant’s business practices, registration status, relationships to retail investors, fees, costs, COIs, standards of conduct, and disciplinary history. Registrants must also engage in enhanced recordkeeping practices.(9)

The compliance date for Reg BI, the associated recordkeeping requirements, and the initial Form CRS filing requirements is June 30, 2020.

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2 Regulation Best Interest: The Broker‐Dealer Standard of Conduct, SEC Release No. 34‐86031, adopting Rule 15l-1 under the Exchange Act.
3 A “retail customer” is a natural person, or the legal representative of such person, who: receives a recommendation of any securities transaction or investment strategy involving securities from a broker-dealer; and uses the recommendation primarily for personal, family, or household purposes. See Rule 15l-1(b)(1).
4 The terms “retail customer” and “retail investor” are used interchangeably throughout this report as the terms are defined and used differently between the Reg BI and Form CRS adopting releases given their applicability and scope. A particular term may be used for alignment in terminology with the respective adopting release and for this reason may appear to be inconsistent from section to section. Firms should defer to the SEC guidance and rule language for clarity of definitions and usage in particular contexts.
5 SEC Rule 15l-1(a)(1)
6 Regulation Best Interest: The Broker‐Dealer Standard of Conduct, page 213, SEC, 2019.
7 See Form CRS Relationship Summary; Amendments to Form ADV, Exchange Act Release No. 86032 (Jun. 5, 2019).
8 For singular broker-dealers and RIAs, Form CRS must not exceed two pages in paper format. For dual registrants that include their brokerage services and investment advisory services in one relationship summary, the relationship summary must not exceed four pages in paper format.
9 Regulation Best Interest: The Broker‐Dealer Standard of Conduct, page 361, SEC, 2019.

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