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What You Need to Know About Reg BI

Despite pandemics, economic concerns, reduced staffing and more, this new regulation is now an official obligation for financial advisers.
Monday, July 20, 2020

As of June 30, 2020, Regulation Best Interest–or Reg BI–is officially in effect. Despite pandemics, economic concerns, reduced staffing and more, this new regulation is now an official obligation for financial advisers.

The goal of these regulations is to provide clear guidance for retail customers regarding their choices in financial and investment services, and to ensure broker-dealers and investment advisers are well-equipped to make this information known to the customers they serve.

What Does Reg BI Stand For?

Reg BI is the abbreviation of Regulation Best Interest. Under these guidelines, professionals are required to adhere to a new standard of care when they make securities recommendations to retail customers.

This regulation applies regardless of the level of guidance a broker, dealer, or adviser is offering. Whether they have a large sum of assets under management or whether they’re providing feedback on the type of account they recommend opening, the level of care and disclosure required is the same.

What’s Involved In Being Compliant With Reg BI?

To comply with Reg BI, advisers must meet four core obligations:

Duty of Disclosure

The disclosure obligation requires written disclosures be provided to a retail customer before or at the time that a product or service is recommended.

These disclosures will cover a variety of topics that are similar to, or build upon, the requirements of Form CRS, including:

    • That the broker, dealer, or natural person is acting as a broker, dealer, or associated person of a broker or dealer when providing the recommendation
    • Any fees and costs that apply to the retail customer’s transactions, holdings, and accounts
    • The type and scope of services provided to the retail customer. A couple of areas specifically highlighted include:
    • Account Monitoring: whether the firm will provide account monitoring service, a description of the service, its frequency and duration
    • Account Balance Requirements: Clarifying details such as minimum account balance or specific thresholds that might cause additional fees to be charged (such as a low balance fee)
    • Any material facts related to conflicts of interests connected to the recommendation

Investment professionals may also offer supplemental oral disclosure if the information they’re providing requires additional information that has not been disclosed under the standard guidance (such as if a particular adviser has a conflict of interest).

The SEC requires firms to document any supplemental oral disclosures; however, the documentation does not have to go into detail regarding the substance of the discussion. As a best practice, firms should consider making additional documentation regarding the conversation as a means of tracking information conveyed orally.

Duty Of Care

Reg BI states that representatives must show a duty of care when making recommendations regarding products and services. In particular, they must exercise diligence and skill to:

    • Understand the risks and rewards associated with recommendations they make to clients
    • Base recommendations on the best interests of the customer rather than on the best interests and financial interests of the firm only

As part of the duty of care, advisers and broker-dealers should disclose costs and fees related to different products/services. However, their recommendations and whether they are in the customer’s best interest will not be judged solely on cost as recommendations may be tailored to a specific customer’s needs and appetite for risk, and the most affordable option may not always be the best choice.

Conflict of interest

The entire focus of Reg BI is ensuring that customers’ interests are placed above the interests of the broker/dealer/representative.

All conflicts must be disclosed. Contests or sales quotas will likely be closely reviewed as they may place pressure on representatives to offer products that are not in the customer’s best interest.

As a broker or dealer, maintaining documentation of different alternatives considered/offered would be wise as a way to ensure there’s no intimation of impropriety and no desire to push clients toward a specific product/service for the benefit of the firm.


As FINRA reviewers evaluate firms’ successes in putting Reg BI guidelines in place, they’ll look for evidence that good faith efforts were taken to establish Reg BI as a part of the organization’s culture of compliance.

As you’re preparing, build, document, and disburse training materials to your team members. Develop sales processes that show an awareness of the required disclosures and a willingness to make them available and easily understood by retail customers.

Is Form CRS Related To Reg BI?

While issued in conjunction with Reg BI, Form CRS is a separate regulatory obligation. Form CRS requires broker-dealers and investment advisors who offer services to retail investors to file with the SEC and to deliver a client disclosure document.

Content to be completed for the relationship summary includes:

    • The types of client and customer relationships offered by the firm
    • Fees costs, conflicts of interest, and standard of conduct associated with relationships and services the firm provides
    • Any reportable legal or disciplinary history against the firm and its financial professionals
    • Methods for obtaining additional information about the firm

Form CRS also includes conversation starters that must be completed, such as:

  • “What is your relevant experience, including your licenses, education, and other qualifications? What do these qualifications mean?”
  • “Help me understand how …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?”

Form CRS/ADV Part 3 should be no more than two pages for broker-dealers and investment advisers. Dual registrants will complete information for both roles but may combine their disclosures into a four-page document.

What Else Should I Know About Reg BI?

Exams for Reg BI have already begun (as of July 2020), so your team should have the appropriate information and processes in place. Training should already have been completed or be well underway (support for training is available if your team is not yet fully up to speed).

There are also a few language changes or definitions that firms should be mindful of. For example, the SEC’s definition of “retail customer” differs from FINRA’s standard definition.

According to the SEC’s guidance for Reg BI, a retail customer is any “natural person” regardless of net worth. If a firm makes a recommendation to a natural person for primarily personal, household, or family purposes, Reg BI will apply and its standards must be followed.

Where Can I Get Additional Guidance on Compliance With Reg BI?

FINRA has created a dedicated web page for Reg BI and Form CRS. Their site offers a one-stop shop for all materials related to these new regulations including content and guidance from the issuer, the SEC.

One of the most useful forms on the site is the Reg BI and Form CRS checklist. This document breaks down, step by step, the requirements firms must meet to be compliant.

If you need additional support and guidance regarding the implementation of Reg BI guidelines, working with our compliance consulting team can give you peace of mind regarding your preparation for your upcoming audit.

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.

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