Regulation Best Interest, or Reg BI, is a set of Securities and Exchange Commission (SEC) rules that govern how broker-dealers and financial advisors must treat their clients. Specifically, it says that these entities must act in the best interests of their client – which sounds clear enough – although the actual standards of conduct are often unclear.
Here are the key components of Reg BI and what they require of those providing financial advice.
The key elements of Regulation Best Interest
The SEC adopted Reg BI in June 2019 and the rule created a new standard of conduct for broker-dealers and their agents in how they interact with retail clients. This standard is particularly applicable when recommending securities or investment strategies involving securities, including account recommendations, to retail clients for personal, family or household use.
The general obligation states: “When making such a recommendation to a retail customer, you must act in the best interests of the retail customer at the time the recommendation is made, without prioritizing your financial or other interests over the interests of the retail customer to set.”
To meet this general obligation, broker-dealers must meet the following obligations:
- Disclosure obligation: Clients must receive full disclosure in writing of all material facts about an investment, including fees, any conflicts of interest, and the broker’s scope and capacity in making the recommendation, among other details.
- Duty of care: This standard requires the broker-dealer to “exercise reasonable diligence, care and skill in making the recommendation,” meaning clients must receive recommendations that take into account costs, client needs and alternative investments.
- Conflict of interest obligation: This duty requires broker-dealers to enforce policies that mitigate or eliminate conflicts of interest between them and clients.
- Compliance obligation: This obligation requires broker-dealers to enforce policies that help them comply with Regulation BI.
Broker-dealers may provide certain disclosure information on the CRS form, including details about the services offered by the company, their costs and other significant fees.
Main issues with Reg BI
Some broker-dealers, financial advisors and investors have raised concerns about Reg BI, particularly about the duty of care and what it requires of the service provider and what customers can expect. Some call the duty of care ‘suitability plus’, suggesting that it asks more of the agent than the suitability standard, requiring clients to be offered ‘appropriate’ recommendations. Neither standard is as strict as the fiduciary standard, which requires an advisor or agent to act in the best interests of the client at all times.
For many, the problem with Reg BI lies in the fact that brokers may have different standards than investment advisors, who generally must operate under a fiduciary standard. Critics say Reg BI fails to impose a fiduciary standard on many brokers, even though they do make investment recommendations, leaving clients open to abuse and deception. Yet the broker’s written documentation may clearly state that it is not acting under a fiduciary standard, in accordance with the law. Customers may therefore decide for themselves what type of advice they receive.
Furthermore, with the rise of artificial intelligence (AI), in July 2023, the SEC proposed significant changes to the way companies manage conflicts of interest and communicate with customers.
How Reg BI affects customers
Reg BI aims to clarify the roles and responsibilities of broker-dealers and advisors to their clients, establishes minimum standards of conduct and directs firms to maintain processes that minimize conflicts of interest between the firm and its clients.
To this end, broker-dealers are required to provide written communications describing the broker’s scope and capacity, and whether or not it is acting as a fiduciary. Service providers must disclose all material information about an investment and any conflicts of interest. This information may be communicated on Form CRS and other written forms for individual investments.
For clients, this means that these documents are the touchstone for how the service provider deals with you and on what basis. In particular, these disclosures should clarify whether the firm is working for you as a fiduciary, which is an important standard for people seeking advice. It also makes clear how the service provider is paid, either through fees or through a commission on products sold to customers. You’ll want to ask these types of questions before entering into a business relationship.
Understanding the company’s incentive and reward system is one of the most important things in understanding the type of advice you are receiving. If the company only receives fees from clients, it is better structured to give you the best advice and avoid conflicts of interest.
Anyone looking for a financial advisor should look for an advisor with these core qualities.
In short
The SEC adopted Regulation Best Interest to protect investors from unscrupulous practices by broker-dealers and others who may monitor and advise on their finances. But a lack of clarity in the rules can leave customers unsure whether they are getting the best advice.
If you’re looking for a financial advisor, Bankrate’s AdvisorMatch can connect you with a CFP professional.
