When Did Regulation Best Interest Go Into Effect?

Financial regulations play an important role in safeguarding the interests of individuals engaging with financial markets. These regulations establish standards of conduct for financial professionals, aiming to foster transparency and trust within the financial services industry. Regulatory bodies work to ensure that investors receive appropriate advice and services.

The Effective Date

Regulation Best Interest (Reg BI), established by the U.S. Securities and Exchange Commission (SEC), officially went into effect on June 30, 2020. This date marked a significant shift for financial advisory services for retail investors across the United States. While the rule itself was adopted in June 2019, the compliance deadline provided firms with time to adapt their practices. Reg BI aimed to enhance investor protection by raising the standard of conduct for broker-dealers.

Understanding Regulation Best Interest

Regulation Best Interest is a directive from the SEC designed to enhance the standard of conduct for broker-dealers and their associated persons when making recommendations to retail customers. Its purpose is to ensure financial professionals act in the best interest of their clients, rather than prioritizing their own financial incentives. This regulation applies to broker-dealers and their associated individuals, including partners, officers, directors, branch managers, and other employees under the broker-dealer’s control.

Reg BI’s scope encompasses recommendations for any securities transaction or investment strategy, including advice on opening account types or transferring assets. A “retail customer” is defined as a natural person, or their legal representative, who receives a recommendation for personal, family, or household purposes. This regulation elevates the standard beyond the previous “suitability” rule, which only required a recommendation to be appropriate without prioritizing the client’s interests.

Key Requirements for Financial Professionals

Regulation Best Interest imposes a general obligation on broker-dealers, satisfied by adhering to four component obligations: Disclosure, Care, Conflict of Interest, and Compliance.

Disclosure Obligation

Broker-dealers must provide retail customers with written, clear, and fair disclosures of all material facts related to their relationship and any conflicts of interest associated with a recommendation. These disclosures must be provided at or before the recommendation is made, detailing the broker-dealer’s capacity.

Care Obligation

Broker-dealers must exercise reasonable diligence, care, and skill when making recommendations to retail customers. This includes understanding the potential risks, rewards, and costs of any recommended transaction or strategy. Professionals must also have a reasonable basis to believe that the recommendation is in the retail customer’s best interest, considering their investment profile and evaluating advice holistically.

Conflict of Interest Obligation

Broker-dealers must establish, maintain, and enforce written policies and procedures to identify and address conflicts of interest. These policies should mitigate conflicts that might incentivize financial professionals to place their interests, or the firm’s, ahead of the retail customer’s. Specific practices, such as sales contests, quotas, or bonuses tied to the sale of particular securities, must be eliminated.

Compliance Obligation

Broker-dealers must implement and maintain written policies and procedures reasonably designed to achieve compliance with Reg BI. These policies should be tailored to the firm’s size, scope, and inherent risks. This ensures a robust framework to monitor and enforce adherence to Regulation Best Interest.