HBL

TPA Negotiator

PBM Negotiator

678-439-6236
678-439-6236

Reg BI In Effect: Breakdown of Four Broker-Dealer Obligations

Home
/
Reg BI In Effect: Breakdown of Four Broker-Dealer Obligations
Reg BI – also known as Rule 151-1 of the Securities Exchange Act of 1934 – applies to the code of conduct for broker-dealers and their staff when making recommendations to retail customers regarding securities transactions, investment strategies, asset rollovers, and other related business. It also applies to hold recommendations that are implicit when coming from mutually arranged investment account monitoring. Reg BI requires that recommendations be based on a customer’s best interest. While “best interest” is not defined, it is broken down into four obligations placed on the broker-dealer and staff when interacting with retail customers, including:  Disclosure Obligation Before broker-dealers can begin making recommendations to a retail customer, they must give a written disclosure detailing their relationship with the customer. This relationship summary explains the fees and costs the customer will incur, the types of services the broker-dealer provides, limitations on recommendations, any conflicts of interest, and any other important details regarding the terms of the arrangement and the scope of services offered. Care Obligation A broker-dealer is required to exercise diligence, care, and skill when making recommendations to customers. To meet the care obligation, broker-dealers must:
  • Understand the risks, rewards, and costs of their recommendations and how those would apply to each specific customer’s situation;
  • Believe that their recommendation is truly in the customer’s best interest; and
  • Consider the investment as a part of the customer’s whole investment profile, examining each investment by itself and as a whole.
Conflict of Interest Obligation The SEC defines a conflict of interest as “an interest that might incline a broker, a dealer, or a natural person who is an associated person of a broker or dealer — consciously or unconsciously — to make a recommendation that is not disinterested.”  Broker-dealers are now required to create and enforce written conflict of interest policies and procedures regarding customer recommendations. These policies must:
  • Identify any potential conflicts and either eliminate them or disclose them to customers; 
  • Identify and mitigate any conflicts of interest where there is an incentive for a broker-dealer to place its interest before the client’s interest;
  • Identify any material limitations such as a limited portfolio of products; and
  • Identify and eliminate any sales quotas, bonuses, contests, or non-cash compensation. 
Compliance Obligation This obligation requires broker-dealers to have written policies and procedures in place that ensure compliance with the new Reg BI. This means putting in place policies that address conflicts of interest and ensure that the disclosure and care obligations are being met in every interaction with a retail customer. The reporting mechanism for complying with Reg BI is the Standardized Customer Relationship Summary, otherwise known as Form CRS, which went into effect on June 30, 2020.  This form includes information on the types of clients and relationships available from the firm, fees and costs, any disciplinary history, and how to obtain more information. Broker-dealers are now required to provide Form CRS to new and existing clients. The experienced, responsive team of ERISA attorneys at Hall Benefits Law helps plan administrators understand what regulations and rulings are relevant and how best to apply these rulings in practice. Learn more by calling 678-439-6236.
Search
Are You an Attorney? Let’s talk!
Request Your Free Book
Case Studies in ERISA: Why It Matters And How It Benefits You, A Plan Sponsor’s Guide To Employee Benefits Legal Compliance
Categories
Newsletter Sign Up