Over the past two decades, the responsibilities of financial professionals have shifted from opening accounts and executing trades to providing advice through financial planning. During this period, it has come into question if financial planning advice is for the benefit of the client or the firm— when trades execute and result in commissions. Previously, not all firms were required to act as fiduciaries.
In 2019 the compliance landscape changed when Regulation Best Interest (Reg BI) was passed. The new legislation requires firms and their advisors to identify any conflicts of interest and financial incentives they receive from recommending financial products. Reg BI expands the U.S. Department of Labor’s fiduciary rule to protect investors further. While there has been some complacency by some firms to fully implement technologies, processes, and policies to ensure Reg BI’s mandates, their timeline has already passed, leaving them subject to SEC enforcement. The SEC’s Division of Enforcement likely is taking a two-part approach in their examination:
“The first wave of Reg BI enforcement is likely to penalize firms that have failed to implement new or improved policies and procedures to comply with Reg BI. The second wave of SEC enforcement “will likely consist of more nuanced enforcement actions, challenging conduct where the application of Reg BI is less clear.” – Kurt Wolfe of Quinn Emanuel’s SEC Enforcement Practice, Brokers Told To Brace For Surge In SEC Reg BI Enforcement, FAMag.
While Reg BI is clear, firms often struggle with monitoring all of the critical components of this law. There are four identifiable duties that firms, their advisors, and associated persons must adhere to under Reg BI:
- Duty of Care
- Duty of Resolving of Conflicts of Interest
- Duty of Compliance
- Duty of Disclosure
Reg BI requires exercising diligence and care of the client, and firms must document why a particular strategy is suitable for the client. Reg BI goes beyond the previous suitability standard. The course of action recommended by a financial professional must be specific to the client and not generic to other clients with similar circumstances. Specifically, the firm and its financial professional must:
- Help clients understand risk, reward, and the costs
- Provide a reasonable basis that recommendations should base on a client’s investment profile/risk tolerance
- Make only recommendations that the account types and IRA rollovers are in the best interest of the client
- Ensure quantitative suitability
- Must have considered other options before making the recommendation
Furthermore, advisors must disclose to clients why they recommend a particular security or investment product to them, including any changes in the investment strategy before implementation. How do firms address all components of Reg BI to ensure they’re compliant? The answer lies in financial technology designed to implement Reg BI- StratiFi.
How Does StratiFi Meet Reg BI Requirements?
Duty of Care
- Help clients understand risk, reward, costs
- A reasonable basis that recommendation should base on their investment profile/risk tolerance
- Recommendation around account types and IRA rollovers be in the client’s best interest.
- Quantitative suitability
- Considered other options
Resolution of Conflicts of Interest
- Mitigate vs. Eliminate
- Expenses – Costs section
- Show risk, return changes
Duty of Compliance
- Implement policies and procedures – Monitoring
- Drift Exceptions
Duty of Disclosures
- Form CRS
- Proposal Disclosures
- Risk Disclosures
StratiFi’s PRISM Ratings™ risk scoring technology provides RIAs, asset managers, and broker-dealers more insight into the risks in their clients’portfolios while keeping them Reg BI compliant. Contact the StratiFi team to find out more and get started today!