Regulation BI Policies and Procedures
Overview
Regulation Best Interest (Reg BI) is a package of rulemakings and interpretations intended to enhance the quality and transparency of investor relationships with financial professionals and brokerages. This package included the new Reg BI Standard of Conduct and new Customer Relationship Summary, both of which take effect on June 30, 2020, and new interpretations under the Investment Advisers Act of 1940, which are effective now.
Reg BI comes with 4 main obligations, each will be discussed below with the scope of the obligation, and the procedures that each entail
- The Disclosure Obligation
- The Care Obligation
- The Conflict of Interest Obligation
- The Compliance Obligation
The Disclosure Obligation
You must, prior to or at the time of the recommendation, provide the retail customer, in writing, full and fair disclosure of:
- All material facts relating to the scope and terms of the relationship with the retail customer
- All material facts relating to conflicts of interest that are associated with the recommendation
This obligation is satisfied by delivering the customer the following disclosures.
Customer Relationship Summary (CRS)
The Form CRS must be delivered to retail investors at the earliest of:
- Recommending an account type, a securities transaction or an investment strategy involving securities
- Recommending a rollover
- Opening an account for the retail investor
The delivery of Form CRS is required to be recorded for books and records. Please see Securities America's quick card below that explains how to record proof of delivery.
Securities America Broker-Dealer Firm Brochure
The Broker-Dealer Firm Brochure must be delivered prior to or at the time of recommending your clients open their first commission account. Securities America is using a layered disclosure approach to disclose specific details, which allows the initial delivery of the Broker-Dealer Firm Brochure and then relies on additional disclosures such as account statements, trade confirmations, fee disclosures, account opening paperwork and product prospectuses.
The Care Obligation
Regulation Best Interest (Reg BI) requires financial professionals, when making a recommendation to a retail customer regarding any account, securities transaction or investment strategy involving securities, to 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 ahead of the retail customer’s interests. This obligation, including documentation, applies even if the recommendation is not taken and acted upon by the current or prospective customer.
Under the Care Obligation, you must:
- Understand potential risks, rewards, and costs associated with recommendation, and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers
- Have a reasonable basis to believe the recommendation is in the best interest of a particular retail customer based on that retail customer’s investment profile and the potential risks, rewards, and costs associated with the recommendation and does not place the interest of the broker-dealer ahead of the interest of the retail customer
- Have a reasonable basis to believe that a series of recommended transactions, even if in the retail customer’s best interest when viewed in isolation, is not excessive and is in the retail customer’s best interest when taken together in light of the retail customer’s investment profile.
Going forward, the Duty of Care form or notes extensive enough to cover the questions asked on the form must be included with every set of paperwork uploaded for review. The questions we are looking to answer are:
- Why are you opening this specific account registration/compensation type
- What other products were reviewed with the client for consideration
- How is the account/transaction being recommended in the client’s best interest? Risks vs rewards, costs, etc.
Below is our version of the Duty of Care. If you would like a customized version with your logo, please contact Sean Rees.
The Conflict of Interest Obligation
The Broker-Dealer must establish, maintain, and enforce written policies and procedures reasonably designed to identify and—at a minimum—disclose or eliminate conflicts of interest. Policies and procedures must:
- Mitigate conflicts that create an incentive for the firm’s financial professionals to place their interest, or the interests of the firm, ahead of the retail customer’s interest
- Prevent material limitations on offerings—such as a limited product menu or offering only proprietary products—from causing the firm or its financial professional to place his or her interest or the interests of the firm ahead of the retail customer’s interest
- Eliminate sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time
Please remember that this is a Broker-Dealer only requirement, nothing is needed from you to satisfy this requirement.
The Compliance Obligation
Broker-dealers must establish, maintain, and enforce policies and procedures reasonably designed to achieve compliance with Regulation Best Interest as a whole. Below are resources that we have put together in order to help you understand and abide by the new policies and procedures. We will be adding more information below as new procedures are added. We are also working on hypothetical cases with examples of Duty of Care forms and notes for approval.
Processes
Employer Plan Rollovers
Securities America has adopted a new Employer Plan Rollover Acknowledgement form (please find the most up to date version of the form in the SAI Forms Library). It will be required for all employer plan rollovers, not just those from ERISA Plans. The form is required any time a recommendation in regard to a rollover is made, even if the client does not follow through with the advice given.
Previously rollovers to a brokerage account did not require pre-approval, now approval is going to be required before rollovers of $100,000 and above can be sent to a brokerage account. Going forward, requests for pre-approval can be submitted to the vault as Existing Account Maintenance. You will have to submit a copy of the EIRA form and a narrative indicating: you are seeking pre-approval for an employer retirement plan rollover; the dollar amount of the rollover; why this rollover is appropriate for this client. We expect this process to change in the future, and we will communicate the new procedure at that time.
Extra Resources
Visit Securities America's Compliance Resources Page for Reg BI
SEC's Frequently Asked Questions Page for Reg BI
SEC's Compliance Guide for Reg BI