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SEC's Reg BI Takes Effect

Despite a legal challenge and other controversies, implementation for the SEC’s long-awaited Regulation Best Interest is here, and the agency is set to begin examinations and enforcement.

More than a year after the Securities and Exchange Commission passed its Regulation Best Interest rule, the implementation day has finally arrived. 

Advisors, brokers, broker/dealers and regulatory agencies have spent months preparing for today, when the Commission will begin enforcing the new rule. The past year has been rife with developments, challenges and controversies surrounding the new rule. 

With Reg BI, the SEC set out to create new standards of conduct for broker/dealers. Previously, brokers had been subject to a suitability standard, in contrast with registered investment advisors, held to a fiduciary standard when offering advice and recommendations to clients. Now, brokers would be required to follow a “best interest” standard, requiring them to act in “the best interest of a retail customer” by not putting their own financial interests ahead of their clients’. 

The new rule included four obligations pertaining to disclosure, care, conflict of interest and compliance. According to the rule, brokers would have to consider costs when making recommendations (though they are not mandated to recommend the least-costly option for consumers). Under the conflict-of-interest obligation, brokers will now have to create policies and procedures that will eliminate (or at least disclose) conflicts that may create an incentive for firms to place their interests ahead of their clients. 

Brokers and advisors will also have to complete a relationship summary (Form CRS), to summarize the parameters of a relationship between the customer and advisor at the outset (including information about services, fees and costs, conflicts of interests, and prior disciplinary history). Brokers and advisors will be asked to show that they have sent their summary to clients within one month of the compliance date. Since the rule was passed last year, the SEC has continued to release additional guidance about Reg BI and Form CRS.

Even before the final rule was enacted, the SEC received criticism for the rule, especially from investor and fiduciary advocates. Former SEC Commissioner Robert Jackson, Jr. was the only commissioner to vote against the rule, calling it a ‘muddled standard’ that would leave many clients dealing with the ramifications of conflicted advice. Numerous advocacy organizations, including the Consumer Federation of America and the Institute for the Fiduciary Standard, have continued to speak out against the rule.

Last September, XY Planning Network, which represents numerous fee-only RIAs, filed suit against the SEC, arguing that Reg BI obfuscated the differences between brokers and advisors and would harm financial planners. Several state attorneys general also filed suit, claiming that Reg BI could potentially negatively impact investors. Last Friday, judges in the Second Circuit Court of Appeals ruled against XYPN and the states, arguing that the SEC had not created Reg BI in an “arbitrary or capricious manner.” While XYPN Co-founder Michael Kitces said the network would consider asking the Supreme Court to take the case, he stressed that advocacy for uniform fiduciary standards would increasingly move to the states. 

Even before Reg BI had been finalized, New Jersey proposed its own uniform fiduciary rule for brokers and advisors, following closely on Nevada’s own proposal for a uniform standard. Massachusetts has moved quicker than any other state. Shortly after Reg BI was passed, Secretary of the Commonwealth William Galvin opened a public comment period for a fiduciary rule for the Bay State. It passed earlier this year (although some consumer advocates argued that the final rule was watered down from the original proposal), and will go into effect this September.

Amid the ongoing legal and legislative battles, advisors and brokers have continued to prepare for the SEC’s and FINRA’s examinations and enforcement of Reg BI. Regulators have stressed that they will be inquiring about good faith efforts to comply with the new rule, and are not looking to play ‘gotcha’ with advisors and brokers. Instead, firms should expect a harder look at compliance in 2021.

In the lead up to implementation, industry analysts have underlined the need for firms to emphasize training for advisors and staff. According to SEC staff, questions about Reg BI compliance were more likely to be included in broader examinations and reviews of firms, rather than being the sole focus of an inquiry. As firms have prepared their Forms CRS, some advisors have been challenged by the form’s mandated brevity. Firms can use only two pages for their forms—four if they are dually-registered. Additionally, some advisors have spoken out about the challenges of writing their forms in accessible ‘plain English’ for clients.

While some expected the SEC to delay the implementation date for Reg BI in light of the COVID-19 pandemic, in April SEC Chair Jay Clayton re-affirmed that the June 30 date would hold. Clayton said that firms had 10 months to properly prepare for compliance, although he noted that firms should reach out to the Commission if they were finding it difficult to meet regulatory requirements because of the crisis.

In addition to Reg BI, the CFP Board’s revised code of ethics and standards of conduct go into effect today, mandating all holders of the designation who engage in financial advice be held to a stricter fiduciary standard than previously demanded. The revised standards technically took effect in October 2019, but the CFP Board gave certificants until June 30 to be in compliance.

The Department of Labor recently submitted its revised fiduciary rule to the White House for review. The original rule was vacated in federal court in 2018, and industry experts expect the new rule to harmonize with Reg BI.


SEC’s Regulation Best Interest Final Rule


SEC’s Compliance Risk Alert

SEC’s Form CRS Instructions


FINRA’s “Reg BI Preparedness Road Map”

FINRA’s Reg BI and Form CRS Checklist

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