Regulation Best Interest or Reg BI is a five-page Rule with a 770-page interpretation. Coupled with the 564-page instructions for Form CRS, the average advisor needs to read, understand, and comply with 1,334 pages. Before you run to Costco to stock up on coffee for some late-night reading; if you’re a registered investment adviser, there’s really no new rule, but a requirement to clarify some aspects of your existing duty. This clarification is required to be entered into the new Form ADV Part 3.
🔔The deadline for compliance is June 30, 2020.
Form ADV Part 3 Format: The following is an overview of the information and format.
𐔃 Introduction
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- State your name and whether you’re registered with the Securities and Exchange Commission as a broker-dealer, investment adviser, or both.
- Indicate that brokerage and investment advisory services and fees differ and that it’s important for the retail investor to understand the differences.
- State that free and simple tools are available to research firms and financial professionals at Investor.gov/CRS, which also provides educational materials about broker-dealers, investment advisers, and investing.
- Include the date prominently at the beginning of the relationship summary.
𐔃 Mandatory document “Headings” phrased as questions.
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- “What investment services and advice can you provide me?”
- “What fees will I pay?”
- “What are your legal obligations to me when acting as my investment adviser? How else does your firm make money and what conflicts of interest do you have?”
- “How do your financial professionals make money?”
- “Do you or your financial professionals have legal or disciplinary history?
𐔃 The document must be concise and in plain English.
Consider a clients’ level of financial experience and write for the audience you want to attract. Think of this as if you’re speaking directly to a client by using “you,” “us,” “our firm,” etc.
Use definite, concrete, everyday words by avoiding language such as “may,” “might,” “could,” etc. In general, steer clear of legal and technical jargon, multiple negatives, boilerplate language, vague or exaggerated statements.
When possible, firms may use graphics or text features within disclosures to provide additional explanations or supplemental information. Layered disclosures that cross-reference or link to additional information or supplements are also permitted.
𐔃 Certain language is prescribed within the document.
The following prescribed language about costs is required:
“You will pay fees and costs whether you make or lose money on your investments. Fees and costs will reduce any amount of money you make on your investments over time. Please make sure you understand what fees and costs you are paying.”
The following prescribed language about standards of conduct is required:
“When we act as your investment adviser, we have to act in your best interest and not put our interest ahead of yours. At the same time, the way we make money creates some conflicts with your interests. You should understand and ask us about these conflicts because they can affect the investment advice we provide you. Here are some examples to help you understand what this means.”
𐔃 Required “Conversation Starters” which must be prominently featured.
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- “Given my financial situation, should I choose an investment advisory service? Why or why not?”
- “How will you choose investments to recommend to me?”
- “What is your relevant experience, including your licenses, education and other qualifications? What do these qualifications mean?”
- “Help me understand how these fees and costs might affect my investments. If I give you $10,000 to invest, how much will go to fees and costs, and how much will be invested for me?”
- “How might your conflicts of interest affect me, and how will you address them?”
- “As a financial professional, do you have any disciplinary history? For what type of conduct?”
- “Who is my primary contact person? Is he or she a representative of an investment adviser or a broker-dealer? Who can I talk to if I have concerns about how this person is treating me?”
Objections to Reg BI
In September 2019, seven states and the District of Columbia sued the SEC to block the new Regulation, and earlier this year, a coalition (which includes the lead sponsors of the Dodd-Frank Act) asked the 2nd Circuit to halt the implementation of the SEC’s Reg BI. While these objections work their way through, we continue to recommend being ready by the June compliance date.
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About Red Oak Compliance Solutions
Red Oak Compliance Solutions is the global advertising review software of choice in the financial services industry. It is a comprehensive suite of SEC 17A-4 compliant features that are 100% books and records compliant and provides clients with 35% faster approvals and 70% fewer touches or better. We also offer Smart Review(SM), which solves for the storage and maintenance of disclosures, helping firms reduce risk, decrease review times, and increase the speed of distribution of marketing materials. Smart Registration(SM) automates the licensing and registration management process to help reduce regulatory risk and time spent on manual processes. Overall, Red Oak allows firms to minimize risk, reduce costs, and increase compliance review process effectiveness and efficiencies.