A FIRM’S GUIDE TO THE
IMPLEMENTATION OF REGULATION
BEST INTEREST AND THE FORM CRS
RELATIONSHIP SUMMARY
September 27, 2019
1
SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global
capital markets. On behalf of our industry's nearly 1 million employees, we advocate for legislation, regulation and business
policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as
an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market
operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New
York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more
information, visit http://www.sifma.org.
This report is subject to the Terms of Use applicable to SIFMA’s website, available at http://www.sifma.org/legal.
Copyright © 2019
The information in this Guide was prepared by Deloitte & Touche LLP (Deloitte) as commissioned by
SIFMA.
The Guide is intended to communicate an awareness of Regulation Best Interest, the Form CRS
Relationship Summary, and an overview of the related implementation considerations.
SIFMA and/or Deloitte makes no representation or warranty to the accuracy of the information as this
Guide is not a complete representation of all the Reg BI requirements.
Deloitte is not, by means of this document, rendering accounting, business, financial, investment, legal,
tax, or other professional advice or services. The discussion and examples presented in this Guide are
for educational purposes. They are not to be viewed as an authoritative statement by SIFMA and/or
Deloitte on the quality and/or appropriateness of an individual organization’s practices. SIFMA and/or
Deloitte provides no assurance over the accuracy or completeness of the requirements for any specific
organization’s readiness for compliance with Reg BI. This Guide is meant to provide a framework to
assist organizations in performing their own implementation analysis. Before making any decision or
taking any action that may affect your organization, one should consult a professional advisor to assess
one’s specific facts and circumstances. SIFMA and/or Deloitte shall not be responsible for any loss
sustained by any person who relies on this Guide.
2
1
Deloitte also wishes to thank the following individuals for their contributions to the development of this Guide: Ajay Philip George, Trupthi P
Papanna Gorur, Marco Kim, Amitam Kumar, Neelima Mishra, Madhuri Munjuluri, Gitika Narang, and Aditya Rajagopalan.
Contributors
SIFMA and its members
Jillian Enoch
Vice President, Federal Government Affairs
Kevin Carroll
Managing Director and Associate General Counsel
Deloitte & Touche LLP
1
Maria Gattuso, Principal mgattuso@deloitte.com
George Hanley, Managing Director ghanl[email protected]
Bruce Treff, Managing Director btreff@deloitte.com
Bob Walley, Principal [email protected]
Gabriela Huaman, Managing Director ghuaman@deloitte.com
Karl Ehrsam, Principal kehrsam@deloitte.com
Craig Friedman, Senior Manager [email protected]
Josh Uhl, Senior Manager juhl@deloitte.com
Christopher Austin, Advisory Specialist Leader [email protected]
Robin Swope, Manager rswope@deloitte.com
Mira Vasani, Manager mira[email protected]
Cody Devine, Consultant codevine@deloitte.com
3
Contents
Contributors................................................................................................................................................... 2
Preface: How to use this Guide ...................................................................................................................... 6
1. Introduction............................................................................................................................................... 7
2. Program Governance ................................................................................................................................. 9
2.1. Identifying key stakeholders, business functions, roles, and responsibilities .................................... 9
2.1.1. Line of Business Leadership ........................................................................................................ 9
2.1.2. Legal .......................................................................................................................................... 10
2.1.3. Compliance ................................................................................................................................ 10
2.1.4. Human Resources ...................................................................................................................... 11
2.1.5. Product ...................................................................................................................................... 11
2.1.6. Marketing .................................................................................................................................. 11
2.1.7. Technology ................................................................................................................................ 12
2.1.8. Business Management .............................................................................................................. 12
2.1.9. Finance ...................................................................................................................................... 13
2.1.10. Risk .......................................................................................................................................... 13
2.2. Assessing organizational readiness for Reg BI Program implementation ........................................ 14
2.3. Developing a workforce and customer change management and communication strategy ........... 17
2.3.1. Change management strategy .................................................................................................. 17
2.3.2. Communication strategy ........................................................................................................... 19
2.4. Acknowledging other regulatory considerations in tandem with Reg BI implementation ............... 21
2.5. Providing an illustrative timeline for program implementation ....................................................... 22
2.6. Providing considerations for estimating program implementation costs ........................................ 22
3. Understanding the Rule and assessing impact ......................................................................................... 25
3.1. Understanding Reg BI ...................................................................................................................... 25
3.2. Business Impact ............................................................................................................................... 27
3.2.1. The Firm’s business structure ................................................................................................... 28
3.2.2. The products and services offered by a Firm and its respective revenue models .................... 28
3.2.3. Conflicts of interest by product and service type...................................................................... 29
3.2.4. Titles used to describe financial advisors .................................................................................. 29
3.2.5. Compensation and incentive models ........................................................................................ 30
3.3. Potential Business Changes .............................................................................................................. 30
4
3.4. Changes to Operations ..................................................................................................................... 32
3.5. Customer Life cycle .......................................................................................................................... 33
4. Disclosure Obligation ............................................................................................................................... 35
4.1 Reg BI Disclosure Obligation .............................................................................................................. 35
4.1.1. Disclosure Requirements of Reg BI ............................................................................................ 35
4.1.2 Oral disclosure ............................................................................................................................ 39
4.1.3 Disclosure after recommendation .............................................................................................. 39
4.1.4 Layering approach ...................................................................................................................... 40
4.1.5 Timing, frequency, and tracking of delivery ............................................................................... 41
4.1.6 Updating disclosure documents ................................................................................................. 41
4.2 Form CRS Relationship Summary and Amendments to Form ADV .................................................... 41
4.2.1 Disclosure Requirements of Form CRS ....................................................................................... 41
4.2.2 Amendments to Form ADV ......................................................................................................... 44
4.2.3 Delivery format and content ...................................................................................................... 44
4.2.4 Layering approach; using links .................................................................................................... 46
4.2.5 Timing, frequency, and tracking of delivery ............................................................................... 46
4.2.6 Updating disclosure documents ................................................................................................. 49
4.2.7 Key Implementation Considerations from Section 4 .................................................................. 51
5. Care Obligation ........................................................................................................................................ 52
5.1. Broker-Dealer’s understanding of particular security or investment strategy (reasonable basis) ... 52
5.1.1. Consideration for complex products ......................................................................................... 53
5.2. Customer-specific recommendation ................................................................................................ 53
5.2.1. Understanding of the retail customer’s investment profile ...................................................... 54
5.2.2. Factors to consider when making recommendations to a particular retail customer ............... 55
5.2.3. Consideration of reasonably available alternatives ................................................................... 55
5.3. Quantitative suitability (series of recommendations) ...................................................................... 56
5.4. Considerations for specific recommendation types ......................................................................... 56
5.4.1. Proprietary products and other limited menus of products and products with third-party
arrangements (e.g., revenue sharing) ................................................................................................. 56
5.4.2. Prospecting ............................................................................................................................... 57
5.4.3. IRA and IRA Rollovers ................................................................................................................ 57
5.4.4. Account Type ............................................................................................................................ 57
5.4.5. Explicit and Implicit “hold” recommendations .......................................................................... 58
5
5.5. Documentation of specific recommendations ................................................................................. 58
5.6. Key Implementation Considerations from Section 5 ........................................................................ 59
6. Conflict of Interest Obligation .................................................................................................................. 60
6.1. Conflicts of interest catalog (types) ................................................................................................. 60
6.1.1. Applicability of Conflict of Interest Obligation .......................................................................... 60
6.1.2. Conflicts of Interest under Reg BI
,
............................................................................................. 61
6.2. Conflict-related controls, policies and procedures .......................................................................... 62
6.2.1. Structure of Conflict of Interest Obligation
,
.............................................................................. 62
6.2.2. Considerations for adopting “reasonably designed” policies and procedures .......................... 63
6.2.3. Considerations for identification of conflicts of interest ........................................................... 64
6.3. Approach to disclosing, mitigating, or eliminating conflicts of interest .......................................... 65
6.3.1. Disclosure, mitigation, or elimination of Conflicts .................................................................... 65
6.3.2. Elimination or disclosure of Conflicts ........................................................................................ 67
6.3.3. Elimination of Conflicts ............................................................................................................. 72
6.4. Considerations for the adoption and implementation of Conflict of Interest Obligation ................ 73
6.5. Key Implementation Considerations from Section 6 ........................................................................ 75
7. Compliance Obligation ............................................................................................................................. 76
7.1. Compliance Obligation Requirements ............................................................................................. 76
7.2. Potential framework for satisfying the Compliance Obligation ....................................................... 79
7.2.1. Risk Assessment ........................................................................................................................ 79
7.2.2. Current-State Assessment and Gap Analysis............................................................................. 79
7.2.3. Target-State Design ................................................................................................................... 80
7.3. Key Implementation Considerations from Section 7 ........................................................................ 82
8. Recordkeeping Requirements .................................................................................................................. 83
8.1. Existing recordkeeping requirements .............................................................................................. 83
8.2. Reg BI and Form CRS recordkeeping requirements ........................................................................ 84
8.3. A proposed framework for recordkeeping implementation ............................................................ 85
8.4. Key Implementation Considerations from Section 8 ........................................................................ 86
6
Preface: How to use this Guide
This Guide provides an overview of Regulation Best Interest (“Reg BI”)
2
and the Form CRS Relationship
Summary (“Form CRS”)
3
, as adopted by the U.S. Securities and Exchange Commission (“SEC”), and provides
a summary of considerations for firms to satisfy compliance with the respective rule amendments.
4
The
Guide aims to assist firms in understanding the various Reg BI and Form CRS requirements and their
potential impacts. The Guide begins with recommendations for developing a Reg BI implementation
governance program and an outline for and their potential impact on firms.
The subsequent chapters of the Guide elaborate on specific Reg BI obligations and also address the
requirements for Form CRS filing and delivery. Considerations for implementation are embedded within
these chapters and are specific to the Reg BI obligation being addressed in the respective chapter. The
chapter on the Reg BI Compliance Obligation describes a potential framework for firms to achieve
compliance with the respective rules. The Guide closes with details on recordkeeping obligations for firms
under amendments made to industry recordkeeping rules.
5
This Guide provides an overview of Reg BI and Form CRS requirements as well as considerations for
implementation; however,
this Guide is not meant to serve as a replacement for the regulatory requirements
described in the SEC Final Rule releases as communicated on www.sec.gov. The final texts for Reg BI and
Form CRS contain a number of specific and detailed requirements along with related clarifications. Firms
are encouraged to read the two adopting releases to familiarize themselves with specific examples and
determine if, and how, such examples might apply to their businesses when preparing an implementation
plan.
6
The SEC has also recently published two compliance guides for small firms: Regulation Best Interest: A
Small Entity Compliance Guide
7
and Form CRS Relationship Summary; Amendments to Form ADV: A Small
Entity Compliance Guide
8
Firms are encouraged to read these compliance guides as well to familiarize
themselves with the SEC guidance provided therein.
Note: This Guide attempted to standardize terminology between the use of the terms “retail customer”,
“retail client”, and “retail investor” as the terms are defined and used differently between the Reg BI and
Form CRS adopting releases given their applicability and scope. In certain sections of this Guide, a
particular term may be used for alignment in terminology with the respective adopting release and for
this reason may appear to be inconsistent from section to section. Firms should defer to the SEC guidance
and rule language for clarity on definitions and usage in particular contexts.
2
Securities and Exchange Commission. 17 CFR Part 240. Release No. 34-86031; File No. S7-07-18. Regulation Best Interest: The Broker-Dealer
Standard of Conduct.
3
Securities and Exchange Commission. 17 CFR Parts 200, 240, 249, 275, and 279. Release Nos. 34-86032; IA-5247; File No. S7-08-18. Form CRS
Relationship Summary; Amendments to Form ADV.
4
Regulation Best Interest amended the Securities Exchange Act of 1934 and applies to registered Broker-Dealers (see CFR 17a-14). Form CRS
Relationship Summary amended both the Securities Exchange Act of 1934 and the Investment Adviser’s Act of 1940 and applies to both broker-
dealers and registered investment advisers (e.g., see CFR 204-5).
5
For Broker-Dealers, Rule 17a-3 and 17a-4 under the Securities Exchange Act of 1934. For registered investment advisers, Rule 204-2 under the
Investment Adviser’s Act of 1940.
6
The SEC also published interpretative guidance entitled, Commission Interpretation Regarding Standard of Conduct for Investment Advisers and
Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion from the Definition of Investment Adviser. See SEC
website for access to these releases.
7
Securities and Exchange Commission. https://www.sec.gov/info/smallbus/secg/regulation-best-interest. 2019.
8
Securities and Exchange Commission. https://www.sec.gov/info/smallbus/secg/form-crs-relationship-summary. 2019.
7
1. Introduction
On June 5, 2019, the U.S. Securities and Exchange Commission (“SEC”) adopted new regulations governing
the conduct of broker-dealers (interchangeably, “Broker-Dealers” or “Firms”) and their natural persons
who are associated persons (“Associated Persons”), particularly with regard to the manner in which these
Firms provide investment recommendations to their customers.
9
Regulation Best Interest (“Reg BI”)
amends the Securities Exchange Act of 1934 (the “Exchange Act”) and imposes principles-based standards
on recommendations to retail customers, requiring that Broker-Dealers and their Associated Persons,
among other things, 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-Dealer ahead of the interests of the
retail customer.”
10
To meet their best interest obligations, Broker-Dealers that provide investment recommendations to their
retail customers must adhere to a number of requirements, including the above principles-based standard
(referred to also as the “General Obligation”), as well as specific disclosure, care, conflict of interest,
compliance obligations. Firms must also adhere to enhanced recordkeeping requirements. Reg BI aims to
provide retail customers with full and fair disclosure about the products and services offered by Broker-
Dealers, including relevant conflicts of interest, to allow these customers to make appropriate investment
decisions pertinent to their investment goals and needs while understanding the associated risks with such
decisions.
11
Broker-Dealers and registered investment advisers (“RIAs”, and together with Broker-Dealers,
“Registrants”) are also required to file with the SEC and deliver to retail customers a Customer Relationship
Summary Form to meet the obligations imposed by the Form CRS Relationship Summary (“Form CRS”).
12
Under Form CRS, in no more than two pages, a Registrant is required to disclose information to its retail
customers about the Registrant’s business practices, including its registration status, its relationship and
services to the retail customer, the fees, costs, conflicts of interests, and standards of conduct as it relates
to those services, and the disciplinary history of the Registrant.
13
This disclosure requirement is intended
to provide retail customers with an understanding of a Registrant’s relationship and business practices to
allow them to make informed decisions when selecting a Registrant with which to conduct business.
The compliance date for Reg BI, the Form CRS rule amendments, and their associated recordkeeping
requirements (hereafter, referred to collectively as the “Reg BI Rule Package”) is June 30, 2020, and this
Guide is meant to provide Registrants with frameworks and considerations for designing, implementing,
and managing their obligations. This Guide is not meant to provide a prescriptive framework for
implementation or interpretative guidance under the Reg BI Rule Package. The below graphic illustrates
these differences:
9
See Securities and Exchange Commission Release Nos. 34-86031; 34-86032; IA-5247
10
See Executive Summary. Regulation Best Interest: The Broker-Dealer Standard of Conduct. SEC. 2019.
11
See page 213. Regulation Best Interest: The Broker-Dealer Standard of Conduct. SEC. 2019.
12
For registered investment advisers, the SEC also amended the Investment Adviser’s Act of 1940 for purpose of Form CRS (see CFR 204-5).
13
For registered investment advisers, the SEC also amended the Investment Adviser’s Act of 1940 for purposes of Form CRS (see CFR 204-5).
8
Figure 1: Purpose of this Guide
9
2. Program Governance
This section is intended to identify key design, implementation, and ongoing delivery considerations for
developing an implementation plan for a Reg BI Rule Package program (a “Reg BI Program”), specifically:
(1) Identifying key stakeholders, business functions, roles, and responsibilities;
(2) Assessing organizational readiness for Reg BI Program requirements;
(3) Developing a workforce and customer change management and communication strategy;
(4) Acknowledging other regulatory considerations in tandem with Reg BI Program implementation;
(5) Providing an illustrative timeline for program implementation; and
(6) Providing considerations for estimating program implementation costs
2.1. Identifying key stakeholders, business functions, roles, and responsibilities
Successful implementation of a Reg BI Program should consider the identification, engagement, and
management of multiple legal, compliance, business, and shared services stakeholders in order to design,
implement, and manage an effective rule implementation program with appropriate program governance.
Given the multiple and complex requirements within Reg BI, it is imperative that an appropriate stakeholder
analysis is conducted by Broker-Dealers implementing such an implementation program. Understandably,
Firms vary in size, organizational structure, and the degree of responsibility among different stakeholders
and functions. As such, the following list is not intended to prescribe all necessary stakeholders and their
required functions for a robust implementation program. Firms should assess their organizational structure
and identify such stakeholders as necessary and appropriate for their business model given differences in
roles and responsibilities across Firms.
Below are considerations for Broker-Dealers in conducting such stakeholder analysis.
2.1.1. Line of Business Leadership
Primary Role:
Serve as decision-maker for business or product strategy and operational impact questions as identified
and recommended by program management.
Primary Responsibilities:
(1) Approve and lead business strategy implicating products and services offered, customer acquisition
and management, and employee performance management;
(2) Approve financial or revenue drivers for the business, including sales strategy and practices
implicating product pricing, customer services and associated fees, marketing and distribution, and
employee or financial advisor compensation;
(3) Oversee the assessment and resolution of conflicts of interest, including compensation and
incentives
(4) Ensure program management meets continuous delivery milestones; and
(5) Approve program budgets and allocate resources as necessary to meet program deadlines.
10
2.1.2. Legal
Primary Role:
Advise compliance and business functions on interpretative questions throughout the Reg BI Program
implementation.
Primary Responsibilities:
(1) Advise on applicability of rule and scope of impact on business(es), subsidiaries, and contracted
third-party service providers in consideration of other applicable regulatory obligations;
(2) Review contractual and service agreement obligations for customers, employees, third-party
service providers, and other market participants;
(3) Review, amend, or advise Compliance on regulatory registrations, licensures, filings, disclosures,
and/or third-party or customer agreements;
(4) Perform legal responsibilities as necessary for ongoing purposes post-implementation; and
(5) Review, identify, and amend applicable disclosures.
2.1.3. Compliance
Primary Role:
Create or enhance existing compliance program to address Reg BI Rule Package requirements; Serve as
liaison between legal and business functions; Advise business function on compliance requirements
throughout the rule implementation program.
14
Primary Responsibilities:
(1) Develop and revise Firm compliance policies and procedures, in coordination with relevant
business and other stakeholders, to ensure compliance with rule requirements;
(2) Provide compliance advisory services to overall program management considering aspects of
change management on a Firm’s compliance program;
(3) Provide oversight for review of advertising, digital tools, marketing, and program development;
(4) Identify and ensure appropriate licensure and registration for all regulated work of the Broker-
Dealer and the individuals performing such work;
(5) Develop oversight, monitoring, testing, and inspections procedures for program implementation
procedures;
(6) Design, develop, and administer licensing, education, and training program for impacted
employees;
(7) Enhance the compliance testing plan to accommodate changes to controls, business activities, etc.;
(8) Conduct post-implementation compliance inspection, assessment, or review; and
(9) Manage appropriate compliance surveillance as necessary for ongoing purposes post-
implementation, including any necessary business reporting.
14
The roles and responsibilities of Compliance may vary at different firms.
11
2.1.4. Human Resources
Primary Role:
Serve as business function support and change management lead throughout the Reg BI Program
implementation related to changes to business strategy or practices, compensation or performance
management practices, talent acquisition strategy, and/or licensing, education, and training practices.
Primary Responsibilities:
(1) Review, and amend or revise if necessary, employee compensation, benefits, or performance
management statements, agreements, or plans
15
;
(2) Review, design, develop, and administer changes to talent acquisition or talent management
strategies; and
(3) Design and execute internal communications strategy.
2.1.5. Product
Primary Role:
Serve as subject matter expert for Firm investment philosophies, product analyses, investment
recommendations, and their associated risks.
Primary Responsibilities:
(1) Develop investment recommendation justifications for Firm’s product lineup, including
information about the target customers, the benefits of the investment product, the risks and costs
associated with the investment product, and other such information as necessary for marketing,
sales process, or training purposes;
(2) Create and develop investment content for marketing and sales distribution materials or other
such customer communications; and
(3) Ensure marketing and sales distribution materials are accurate, fair, and balanced regarding
investment products; conversely, ensure risks associated with such materials are appropriately
disclosed for initial implementation and for ongoing purposes post-implementation.
2.1.6. Marketing
Primary Role:
Serve as liaison between investment management, legal, compliance, and business functions to create,
coordinate, and deliver marketing materials, communications, and required disclosures to customers
throughout program implementation and thereafter.
15
Such action may be required if the firm participates in a pay-for-referral, pay-for-enrollment, stock incentive compensation plan, or other
compensation-based or commission-based compensation program for sales or trading employees. See Conflicts Obligation for more information.
12
Primary Responsibilities:
(1) Create, coordinate, and deliver marketing materials, strategic communications, and required
disclosures to customers throughout rule implementation program and thereafter;
(2) Assess and inform business functions on strategic messaging, customer and competitive responses,
and market participant dynamics throughout rule implementation program; and
(3) Ensure consistency across new and dated marketing materials for ongoing purposes.
2.1.7. Technology
Primary Role:
Serve as business function support and technical lead for technology enhancements, upgrades, or
onboarding of systems or third-party service provider integration throughout rule implementation
program.
Primary Responsibilities:
(1) Serve as technical subject matter expert on technology enhancements, versioning, upgrades, or
vendor procurement as necessary for Reg BI Program implementation;
(2) Design, build, and test systems integration and/or third-party service provider integration
necessary for Reg BI Program implementation;
(3) Ensure system access, change control, supervision, and oversight are appropriately designed and
built for compliance obligations; and
(4) Ensure information security, data privacy, and technology risk and control requirements to meet
applicable Firm policies, industry standards, and regulatory compliance requirements.
2.1.8. Business Management
Primary Role:
Lead business strategy and operational transformation as necessary for the Reg BI Program
implementation.
Primary Responsibilities:
(1) Ensure ongoing execution of operational functions of the Broker-Dealer, including all applicable
regulatory requirements for front-, middle-, and back-office business functions;
(2) Design, develop, and administer appropriate supervision and oversight of obligations imposed by
Reg BI for both operational and employee purposes;
(3) Design, develop, and administer an appropriate business and systems control environment to
ensure compliance with obligations imposed by Reg BI and other associated regulatory
requirements; and
(4) Manage and inform appropriate shared services stakeholders for ongoing purposes as business
strategy or operational changes occur.
13
2.1.9. Finance
Primary Role:
Serve as liaison between business and shared services functions in assessing and modeling financial impact
on implementation costs and changes to business strategy.
Primary Responsibilities:
(1) Assess and model the financial impact of changes to pricing, fees, commissions, or other financial
changes to products, services, and employee or financial advisor compensation;
(2) Assess and plan for costs associated with Reg BI Rule Package compliance; and
(3) Manage ongoing financial modeling as new products are launched, and business strategies and
product and service offerings are developed.
2.1.10. Risk
Primary Role:
Serve as liaison between or in tandem with compliance and business functions in the design,
implementation, and testing of the business control environment; Advise business function on its risk
profile and associated mitigation strategies throughout the Reg BI Program implementation.
Primary Responsibilities:
(1) Conduct initial-state risk assessments to understand business’s overall risk profile with regard to
products and services offered, potential conflicts of interest (e.g., business line, compensation),
and third-party service provider vulnerabilities;
(2) Engage business, technology, and shared services stakeholders throughout rule implementation
program to ensure risks are appropriately identified and mitigated given proposed changes to
people, process, technology, and business strategy;
(3) Design, develop, and implement necessary controls as changes to people, process, technology, and
business strategy are developed as a result of Reg BI Program; and
(4) Conduct post-implementation risk assessments and ongoing control testing to ensure business is
appropriately managing its risk profile.
Below is a representative program governance framework with identified stakeholders and suggested
primary roles throughout rule implementation as roles and responsibilities vary across Firms.
14
2.2. Assessing organizational readiness for Reg BI Program implementation
Many considerations for assessing a Firm’s organizational readiness depend on an initial-state business
model. This initial-state model accounts for the size, scope, and complexity of the Firm’s business model,
including the products and services it offers its customers. Firms with more uniform product and service
offerings, centralized supervision structures, and simplified or model investment philosophies will likely
find lower organizational readiness barriers to adopting Reg BI Rule Package requirements. Conversely,
Firms offering more complex products and service offerings, decentralized supervision structures, and
more nuanced or competing investment philosophies across business lines will likely find higher
organizational readiness barriers given the change management necessary to meet the various
requirements of the Reg BI Rule Package.
The framework below seeks to assist program management in assessing its Firm’s organizational readiness
to adopting Reg BI Rule Package requirements. This framework is neither comprehensive nor exhaustive;
rather, it identifies key questions involving people, process, technology, and business strategy that Firms
may consider in determining the organizational readiness for a program governance structure. Answers to
such questions will likely implicate the degree to which implementation efforts impact a Firm’s operations,
strategy, and people.
Figure 2: Reg BI Program governance framework
15
Table 1: Potential framework for organizational readiness
Category
Topic
Change Management Considerations
People
Employee Management
(Talent Acquisition,
Retention, Management)
• Does the Firm retain the technical talent necessary to
meet its obligations imposed by the Reg BI Rule
Package, including administration, enforcement, and
interpretation?
• Does the Firm appropriately manage the technical
talent necessary to meet its obligations imposed by
the Reg BI Rule Package?
• Does the Firm anticipate additional resources are, or
will be, required for implementation of obligations
imposed by the Reg BI Package?
Customer Management
(Customer, Vendor,
Market Participant
Management)
•
Does the Firm understand the applicability of the Reg
BI Rule Package on its customer populations?
• Does the Firm understand and appropriately manage
its customer population demographics? For example,
does the firm appropriately provide products and
services that are suitable for its customer
demographics?
• Does the Firm effectively and appropriately manage its
customer acquisition strategy?
• Does the Firm appropriately manage its customer
relationships to ensure it is acting in the best interest
of such?
• Does the Firm adequately understand the components
of the customer life cycle and the individual customer
needs at each stage of the cycle?
Financial Advisors
•
Does the Firm appropriately manage financial advisors’
understanding of the differences between risks and
costs across products?
• Does the Firm provide financial advisors the tools
necessary to facilitate client management and
investment recommendation processes?
Process
Compliance Program
•
Are the appropriate people positioned to assist with
the development of policies and procedures for Reg BI
Rule Package compliance and conflict mitigation? Are
individuals appropriately identified as Associated
Persons for purposes of Broker-Dealer oversight and
surveillance?
• Are individuals appropriately registered to conduct
securities and supervisory activities on behalf of the
Broker-Dealer (e.g., Series 24, Series 65)?
Supervision
•
Does the Firm employ an appropriate number of
supervisory principals to reasonably conduct
16
Category
Topic
Change Management Considerations
supervision of registered persons on behalf of the
Broker-Dealer?
• Does the supervisory structure exist as a centralized or
decentralized model? Does this supervisory structure
meet the compliance requirements of the Reg BI Rule
Package?
• Does the Firm appropriately manage the risk profile of
branch offices?
• Does the Firm have appropriately-designed policy
escalation and exception procedures?
• Does the Firm have an aggregated view of its data to
identify trends and high-risk behavior?
Sales / Compensation
Practices
• Does the Firm employ sales practices or compensation
practices that conflict with the obligations imposed by
the Reg BI Rule Package?
• Does the Firm employ an appropriately-designed
compensation model for sales personnel, relationship
managers, registered representatives (“RR”), and/or
Associated Persons?
• Does the Firm appropriately monitor or mitigate risk in
its employee compensation programs?
• Does the Firm understand the risks associated with
pay-for-referral, stock compensation plan, pay-for-
enrollment, or similar sales-based compensation
programs? Are these risks appropriately identified,
documented, controlled, and/or mitigated?
Performance
Management
• Does the Firm have an appropriate incentive and
disincentive program structure to manage the
performance of its registered persons?
• Are the consequences for performance management
or policy violations appropriately designed to mitigate
their associated risks and/or disincentivize their
occurrence?
Technology
System Integration
•
Does the Firm require new or updated systems,
technology, technology governance, or third-party
service providers to implement requirements imposed
by the Reg BI Rule Program?
• Does the Firm employ document digitalization
technologies or electronic delivery technologies that
would aid in the delivery of Reg BI Program
requirements?
Information Technology
(“IT”) Risk and Controls
•
Does the Firm employ an appropriately-designed and
adequately performing governance program for
systems and their associated risks?
17
Category
Topic
Change Management Considerations
• Does the Firm have the appropriately-established
controls to mitigate operational risks pertinent to its
business model?
• Does the Firm properly educate and train IT personnel
on the regulatory responsibilities imposed by Reg BI in
its development of software and technology on behalf
of the Firm?
Oversight and Monitoring
• Does the Firm adequately understand its compliance
obligations for onboarding or employing third-party
service providers for Reg BI Program purposes?
• Does the Firm have appropriately-designed and
adequately performing due diligence oversight of new
or existing third-party service providers?
• Does the Firm have identified and documented points
of contact for new and existing third-party service
providers for crisis management, business
contingency, and operational excellence purposes?
• Does the Firm appropriately manage its third-party
service providers in order to ensure it is meeting its
obligations imposed by the Reg BI Rule Package?
Strategy
Products Offered
•
Does the Firm promote certain products over others
across business lines that potentially present a conflict
of interest? For example, does the Firm give
preferential treatment to new product offerings that
are equally suitable for customers?
Services Offered
•
Does the Firm understand its obligations imposed by
the Reg BI Rule Package as a result of these service
offerings?
2.3. Developing a workforce and customer change management and communication
strategy
2.3.1.
Change management strategy
Based on a Firm’s business model, the scope and complexity of its products and services, its customers,
and its sales and compensation practices, the degree to which change management considerations affect
its program governance could vary significantly. While not intended to provide a prescriptive change
management strategy, the following framework provides considerations for Firms as they develop a change
management strategy for Reg BI Program implementation that is appropriate in scope and design for the
Firm’s specific needs.
The change management strategy framework assesses key questions involving people, process,
technology, and business strategy which Firms may consider as part of a program governance structure.
Answers to such questions will likely implicate the degree to which implementation efforts impact a Firm’s
operations, strategy, and people.
18
In general, the following table outlines high-level change management tasks that Firms may wish to
consider as part of their rule implementation program. With all topics, a Firm may need to consider if a
particular topic applies to the Firm’s implementation efforts, and if so, what degree of effort the Firm will
need to dedicate to such topic. Answers to these topics will implicate overall program implementation costs
and implementation timelines.
Table 2: Potential framework for change management strategy
Category
Topic
Change Management Considerations
People
Education and
Training
• Annual Compliance Meeting
• Job-specific trainings
•
Policy and procedure trainings
Human
Resources
•
Employee and financial advisor compensation practices (e.g.,
incentive compensation)
• Talent acquisition and retention practices
•
Performance management changes
Licensing and
Registration
•
For non-dually registered Firms, a review of the use of the terms
“financial advisor” or “advisor” in marketing materials, customer
communications, and registered persons representations
• Registration of persons (e.g., Series 65 requirements)
Process
Policies and
Procedures
• Written Supervisory Procedures
• Registered principal responsible
• Escalation procedures (for policy questions)
• Exception procedures (for Firm policies and procedures)
• Complaint handling (identification and remediation)
• Books and records
• Conflict of Interest policies and procedures
•
Reg BI Program policies & procedures
Regulated
Work
•
Regulatory filings (e.g., Form CRS, Form BD changes if applicable)
• Books and records (e.g., Form U4, U5 changes)
• Outside business activities
• Code of Ethics
• Political contributions
• Gifts and entertainment
Oversight
• Control testing
• Control and operational oversight
•
Surveillance changes
Supervision
•
Associated Persons
• Financial operations
• Front-office operations
• Middle/Back-office operations
• Books and records
• Communications
• Marketing (forward and backward looking)
• Trading (oversight/surveillance of RR or financial advisor trades;
market participants)
19
Category
Topic
Change Management Considerations
• AML/FinCEN
•
Powers of attorney or authorized agents on accounts
Technology
System
Integration
•
Ownership and decision-making structure for implementation
•
Ongoing management and oversight
Process
Automation
• Opportunities to automate or consolidate processes
• Implement automated, preventative system controls
•
Enhance data analytics and reporting technologies
Vendor
Management
• Vendor identification and due diligence
•
Vendor procurement
Books &
Records
•
Contract requirements
• Data privacy
• Service agreements
• Control documentation
Strategy
Sales Practice
• Product offerings (i.e., self-directed vs. recommended)
• Digital vs. face-to-face recommendations
• Model portfolios (vs. managed accounts)
• Share classes (particularly, as investment recommendations)
• Business lines (e.g., conflicts of interest, sales strategy)
• Customer acquisitions (e.g., cold-calling, etc.)
•
Financial advisors’ compensation
Compensation
•
Employee compensation
• Product fees (e.g., share class pricing)
• Trading commissions (self-directed, online vs. call)
• Administrative fees (e.g., 12b-1 fees)
Sales and
Service
Offerings
• Account administration (e.g., managed, discretionary)
• Solicited vs. unsolicited trades (e.g., individual, RIA, Investment
Adviser Representative (“IAR”), RR)
• Account monitoring (initial and ongoing)
• Account type (e.g., managed, brokerage v. advisory, 401k rollovers)
• Account trading (solicited vs. unsolicited)
• IRA account services (e.g., terms and conditions)
Products
• Suitability recommendations (e.g., share class, similar investment
objectives, pricing)
• Trade aggregation (and its associated fees)
• Product shelf considerations (e.g., open or proprietary)
2.3.2. Communication strategy
An appropriately designed communication strategy may be required, given the degree to which a Firm
chooses to modify its product and services marketing, business strategy, and operations as a result of Reg
BI Program implementation. A well-planned and organized communication strategy will consider both
internal and external stakeholders as part of its communications. Internal stakeholders could include
employees, business and operational management, marketing, and other specialized functions within Firms
as necessary. External communications could include Firm customers, the public, third-party service
providers, other market participants and utilities, and regulators. The framework below offers suggestions
20
that a Firm may consider in an overall communication strategy as part of Reg BI Program implementation.
Firms may wish to consider how such communications take into account important factors in terms of
audience, timing, messaging, and impact or reaction.
Definitions for Communication Strategy Framework:
o Business strategy – communications describing changes to business strategy that could implicate
inbound vs. outbound sales, customer and product prospecting, etc.
o Education – communications detailing or administering educational or awareness materials
o Change management – general communications describing implications to employee or business
practices, including employee compensation, compliance, performance management, job
description changes, etc.
o Operations – communications describing operational or infrastructure changes, including vendor
procurement, technology enhancements, etc.
o Product / service – communications describing changes to discretionary trading practices,
securities recommendation practices, account services offered, etc.
o Fees / commissions – communications describing changes to customer or customer billing, fees,
commissions, or other associated costs borne by such individuals
o Required customer notice – communications describing changes to Firm registrations, licensures,
marketing materials, or service agreements or contracts for customers and/or third-party service
providers which require customer notice, including account service agreements, data privacy
sharing agreements, etc. Retail customers can also be notified to expect the delivery of Form CRS
starting from June 30, 2020.
o Required regulatory notice – communications to regulators describing changes to Firm
registrations, licensures, or marketing materials as required by applicable regulatory requirements
(e.g., Form BD, Form CRS, Form ADV changes) or account service agreement changes (e.g., IRA
service agreement), etc.
The following framework proposes internal and external stakeholders that Firms may consider in
implementing a robust and effective communication strategy as part of its Reg BI Program
implementation:
Table 3: Potential framework for communication strategy
Category
Group
Topic of Communication
Internal
Stakeholders
Employees (e.g.,
financial advisors,
registered
principals)
• Business strategy
• Education
• Change management
• Product / service
•
Operations
Management
• Business strategy
• Education
• Change management
• Product / service
•
Operations
21
Category
Group
Topic of Communication
Marketing
•
Business strategy
• Education
• Change management
• Product / service
Specialized business
functions
• Business strategy
• Education
• Change management
• Product / service
• Operations
• Additionally, Firms may consider: Enterprise risk
management, data privacy, financial crimes oversight
changes
External
Stakeholders
Customers
•
Business strategy
• Product / service
• Fees / commissions
• Required customer notice
The Public
• Business strategy
•
Product / service
Third-Party Service
Providers
•
Business strategy
• Product / service
• Operations
Market
Utilities/Participants
• Business strategy
• Product / service
• Operations
Regulators
• Business strategy
• Product / service
• Fees / commissions
• Operations
• Required customer notice
•
Required regulatory notice
2.4. Acknowledging other regulatory considerations in tandem with Reg BI implementation
As with any rule implementation program, Firms should holistically consider the universe of potential
impacts on their other regulatory obligations given their registration status, their business and operational
models, the products and services offered, their geographical location, and the jurisdiction of their
regulators. While this Guide does not discuss in detail other regulatory obligations, as Firms implement
changes to their business strategies, operations, products and services, or human capital management as
a result of the Reg BI Program, they may wish to consider impacts on other, applicable regulatory
obligations, including:
22
o SEC regulations;
o Financial Industry Regulatory Authority (“FINRA”) rules;
o Individual state laws and regulations;
o Municipal Securities Rulemaking Board requirements;
o Department of Treasury requirements;
o Department of Labor (“DOL”) requirements;
o Office of the Comptroller of the Currency requirements; and/or
o Emerging and existing state fiduciary requirements.
In addition, other voluntary best practices, such as the Certified Financial Planner Board of Standards, Inc.
fiduciary requirements, may be considered for individuals.
2.5. Providing an illustrative timeline for program implementation
Critical to the success of effective program governance is the understanding of the various program
milestones and compliance dates for Reg BI Rule Package implementation. Below is a depiction of the
compliance dates as set forth by the SEC in publishing the Reg BI Rule Package adopting releases.
16
Figure 3: Reg BI Program compliance implementation timeline
In consideration of the approaching compliance dates in June 2020, Firms should maintain perspective of
how these dates align with other operational considerations and budget priorities. For example, the
compliance date marks the end of the second business quarter, and Broker-Dealers often execute a number
of functions at quarter-end, including sending customer account statements, filing quarterly regulatory
reports, or finalizing and closing financial books. These competing priorities may pose operational or
budgetary constraints may need to be considered by Firms as part of Reg BI Program implementation.
2.6. Providing considerations for estimating program implementation costs
Firms may wish to consider a number of factors when determining an appropriate cost estimate for their
rule implementation program. While these factors will vary largely in degree from Firm to Firm given
variances in business model and organizational readiness, Firms may want to consider undergoing a formal
budget review process for Reg BI Program implementation. Such a review could include considerations of
both front-end and ongoing implementation costs as well as opportunities to consolidate or converge
16
Reg BI and Form CRS adopting releases were published in the Federal Register with an effective date of September 9, 2019. See footnote 2 and
3, respectively.
23
collective business efforts (e.g., technology enhancements or process automation) to maximize cost-
reduction potential.
Possible cost considerations for Reg BI Program implementation and ongoing expenditures could include
the following:
Table 4: Possible cost considerations for program implementation
Category
Potential Implementation Costs
Human Capital
•
Additional full-time employees (e.g., ongoing surveillance, oversight,
supervision, and reporting)
• Reallocated full-time employees (e.g., ongoing surveillance, oversight,
supervision, and reporting)
• Third-party resources (e.g., contractors, vendors, outside counsel spends)
• Ongoing surveillance and reporting activities
• Ongoing supervision and monitoring of employees
• Ongoing compliance considerations
Operational
Impacts
• Program evaluations (e.g., compensation structure, product due diligence,
account type recommendations, conflicts of interest, service offerings,
customer service-level impacts)
• Performance management changes
• Education and training programs
• Disclosures and communications delivery
• Marketing materials review (i.e., current-state and future materials)
• New or enhanced business processes
• New or enhanced business controls
•
Opportunity deferrals and business plan disruption impacts
Technology
Investments
•
Process automation or enhancements
• Data analytics and reporting
• Vendor procurement or system integration
• Supervisory controls
• Software or product licensing fees
In considering program implementation costs and expected ongoing expenditures, many Firms undertook
a similar exercise when considering the DOL fiduciary rule proposal in 2017. While not an exact comparison,
Firms may find it efficient to benchmark against prior DOL fiduciary rule program cost estimates when
assessing the impact of Reg BI Program requirements. As a comparison, the following industry data was
published by Deloitte in August 2017 following input from industry participants.
17
From the DOL fiduciary
rule’s issuance in April 2016 to the publication of the report in August 2017, financial institutions reported
a total spend to-date (i.e., “start-up costs”) of $595 million with an anticipated $200 million spend for the
remainder of 2017.
18
Additionally, the table below illustrates the average spend (based on size) of these
financial institutions:
17
The DOL Fiduciary Rule: A study of how financial institutions have responded and the resulting impacts on retirement investors. Deloitte &
Touche LLP. August 2017. All references below in the remainder of this section refer to this publication.
18
The DOL Fiduciary Rule: A study of how financial institutions have responded and the resulting impacts on retirement investors. Deloitte &
Touche LLP. August 2017. Page 17.
24
Figure 4: Average spend (based on size) for financial institutions
From the same study, Deloitte multiplied the average cost estimate of each financial institution size
category by the number of institutions in their respective size category.
19
This calculation yielded the
following cost estimates for both Broker-Dealer “start-up costs” to implementation and ongoing annual
costs for compliance.
Figure 5: Estimated total Broker-Dealer start-up costs
Figure 6: Estimated total ongoing annual costs
It is expected that each Firm will approach its rule implementation governance program independently
with particular consideration and attention given to its interpretation of the Reg BI Program, its business
model and objectives, its product and service offerings, and its risk appetite for compliance.
19
^Ibid. Number of Broker-Dealers in industry, per DOL: Large, n = 42; Medium, n = 147; Small, n = 2,320. Deloitte Whitepaper (2017); page 18.
25
3. Understanding the Rule and assessing impact
This section provides a framework for Firms to understand the Reg BI Rule Package requirements and its
impact on their business and operations. This includes identifying key stakeholders and decision makers,
establishing subject matter expertise, agreeing on the meaning of rule requirements, and making business
decisions associated with the requirements.
This section is intended to identify key elements for consideration when developing an approach to
compliance with a Reg BI Program, specifically:
o Conducting an impact assessment to develop a clear understanding of how the Firm is currently
addressing the elements of the Reg BI Rule Package and assessing how Reg BI Program
requirements will impact the current state
o Making business decisions on how to respond to Reg BI Program impacts
o Designing changes to current-state operations intended to support the business decisions taken
and address compliance gaps in the current-state model
This section will also identify various points in the customer life cycle where the Reg BI Program should be
considered.
3.1. Understanding Reg BI
Reg BI is a significant regulatory change with components and elements that directly or indirectly affect
various units and divisions of a Firm. Hence, it is recommended that the Reg BI Rule Package and its core
requirements are understood by impacted functions within the Firm, including product, operations,
compliance, legal, technology, and finance. Without a consistent understanding of the regulation, Firms
may be challenged to assess the impact of the Reg BI Program and identify, escalate, and resolve items
supporting rule compliance and business decisions. At the same time, these functions need to have a
consistent understanding of the Reg BI Program, so that they are synchronized and coordinated, leading to
cohesive efforts across the Firm.
There are opportunities for differences in understanding the requirements by different functions, as Reg
BI, itself, is not definitive or prescriptive in various instances (e.g., the definition of “best interest” and
“reasonably designed” policies and procedures). Firms may wish to consider conducting workshops with
participants from each of the impacted functions. These workshops might serve as the foundation for
further impact analysis across various divisions and businesses. They may also be a platform for the
stakeholders to come together to identify and plan the future course of action as it pertains to Reg BI
Program compliance.
Firms should consider establishing a core Reg BI Program team with representation from multiple functions
(e.g., operations, compliance, legal, technology, risk, product), to undertake the various activities needed
to comply with Reg BI Rule Package requirements. This team may consist of internal and/or external
resources. Below are the pros and cons of involving internal resources vs. external resources for a Reg BI
Program team:
26
Table 5: Pros and cons of involving internal resources vs. external resources for a Reg BI Program team
Option/
Parameter
Internal Resources
External Resources
Both Internal and External
Resources
Pros
Identifying a core group of
internal resources enables
Firms to leverage groups and
individuals who already have
a strong understanding of
the Firm, its business and
product line, e.g., resources
previously involved with the
DOL fiduciary rule may be
leveraged to support this
effort.
Engaging external
resources to support the
Firm in understanding Reg
BI may provide additional
marketplace perspective
and reduce the demand
on internal resources who
may not have bandwidth
to support Reg BI efforts in
addition to business as
usual (“BAU”).
This has the potential to take
the best of both options;
internal resources will
provide Firm-level insights
while external resources will
bring expertise and industry
insights. Internal resources
may have capacity to focus
on BAU while available to
provide Firm-level
information.
Cons
The time and opportunity
cost of engaging these
resources may be relatively
high as BAU may be
impacted and other
initiatives may be delayed.
Firms may be challenged to
identify industry leading
practices as it relates to the
questions they are seeking
to answer.
The direct cost is higher
but the demand on
internal resources is lower
as they are able to focus
on the issues requiring
decisions rather than
understanding rule
requirements.
It may require a strong
Program Management
Office (“PMO”) to ensure
efficient team coordination
and management of
associated costs;
communication is critical so
the information between
internal and external
resources need be
exchanged in a timely
manner.
Broker-Dealers may choose one option over others depending on their history of undertaking such large
compliance and transformation efforts, comfort with and understanding of the subject matter, and capacity
to manage this effort in addition to BAU.
As many of the rule requirements are principles-based, this team should identify clarification points and
questions and develop Firm-specific interpretations and definitions to share with the relevant parties. This
team may want to conduct workshops and regular meetings for stakeholders to share the analysis, clarify
questions, and ensure involvement of appropriate resources and escalation of questions and issues.
While an understanding of Reg BI Rule Package requirements is critical, the Reg BI Program team may also
benefit from a robust communications framework to share Reg BI Program requirements and decisions
with stakeholders impacted by rules. A framework should consider who should be communicated to, when,
how and in what capacity; for example, the Firm may want to communicate updates to its field force about
the product portfolio as and when a decision is made or wait until formal training is administered. The
timing and medium of communication are important to consider. Firms may choose different media for
27
different communications to different stakeholders, and the manner and content of which they choose will
be unique to each. The team may also engage external parties for communication design and delivery.
Overall, a cohesive and consistent understanding of the Reg BI Rule Package requirements will lay the
foundation for understanding the potential impact of the Reg BI Program on a Firm’s current-state business
and help the Firm undertake decisions and changes it may want to implement in response to the rule
requirements.
3.2. Business Impact
Once a working understanding of the Reg BI Rule Package has been established, Firms should consider
developing an understanding of its impact on the existing business structure followed by a consideration
of changes that may need to be made as a result. It is suggested that the groups responsible for
understanding Reg BI Rule Package requirements engage with appropriate business owners who can
provide context regarding the impact of potential changes. Particular attention should be paid to business
areas that are considered critical or core to the Firm’s business operations, and it is important to recognize
many of these elements are interrelated and should not be considered in isolation. Areas of consideration
may include:
(1) The Firm’s business structure (e.g., a Broker-Dealer, an RIA), a dual Registrant or a financial
institution that has both a registered broker-dealer and a registered investment adviser as separate
and distinct legal entities (a “Hybrid Firm”);
(2) The products and services offered by the Firm and its respective revenue models, including any
specific limitations imposed by the Reg BI Program;
(3) Conflicts of interest at the Firm (including its affiliates) and at the registered representative level;
(4) Titles used to describe financial advisors (e.g., the terms “advisor” or “adviser”, in marketing
materials, legal entities’ documents, customer agreements, and financial advisor licenses); and/or
(5) Compensation and incentive models, including compensation differences by:
o Product (e.g., affiliated vs. nonaffiliated, security type, Firm, share class);
o Account type (e.g., brokerage, advisory, annuity, retail vs. retirement);
o Source (e.g., IRA rollover); and/or
o Incentive programs and their criteria for qualification.
A suggested approach when reviewing each of the elements mentioned above is to determine potential
change(s) that the Firm may decide to make in response to the Reg BI Program and the level of impact that
these change(s) may have on the business model and operations.
Illustrative Example:
Impact of Reg BI on the products and services offered under the Broker-Dealer (for dually-registered Firms)
o Is a change under Reg BI required or optional? Optional
o What are potential changes that may need to be made? Potentially move certain services – financial
planning, portfolio monitoring -- out from the Broker-Dealer and to the RIA
o Is the area of impact critical to business, important to business or ancillary? Critical to business
28
o Could impact to the current model cause Financial Advisors or customers to leave or stay?
Potentially leave - will require a communications program and implications for the customer and
representative experience
o Might it present a competitive advantage? Potentially – by enabling the Broker-Dealer to have a
more transaction focused business model
o Is the financial impact of the change negligible, minor, or significant? Potentially significant
3.2.1. The Firm’s business structure
Firms may operate under a variety of business structures and be registered as a Broker-Dealer, an RIA, or
a dual Registrant or Hybrid Firm. The business structures drive how RRs and financial advisors engage with
customers and the types of products and services they provide. Firms should consider leveraging their
understanding of Reg BI Program requirements to evaluate how these different structures are impacted by
rules, which may facilitate discussions among stakeholders regarding future state and potential changes.
3.2.2. The products and services offered by a Firm and its respective revenue models
It is important to understand how Reg BI Program requirements may impact a Firm’s decision to continue
to offer certain products, while possibly adding others to the product shelf. Firms may want to consider
developing an inventory of all products and services currently offered, which would support additional
discussion and evaluation of compensation practices, revenue models, and conflicts of interest. Suggested
elements may include:
o The product type (e.g., ETF, mutual fund, individual security, annuity);
o The service type (e.g., a managed account, self-directed account or advisory, brokerage, or digital
educational tools vs. providing investment advice); and
o The firm type offering a product or service (e.g., a Broker-Dealer, an RIA, a dual Registrant or Hybrid
Firm).
For each product type and service, the Firm should consider undertaking a revenue analysis. This analysis
might include a breakdown of the various revenue streams associated with each product type and service,
as well as a breakdown of the business structures and account types under which the product types and
services are offered. The Firm should also consider analyzing for each product and service type:
o The level of due diligence that is performed at the Firm and RR or financial advisor level;
o The costs to the retail customer and how such costs benchmark the cost and performance to
alternatives, including alternative share classes (this would also include evaluation of how
proprietary products are evaluated vs. non-proprietary alternatives);
o The level of understanding that customers, RRs, or financial advisors have of the products’ or
services’ complexities and risks;
o The customer segment(s) to which the product or service is offered and the investing goals that it
helps to address; and/or
o How the product or service is sold and the level of supervision, surveillance, and testing of sales
practices.
29
3.2.3. Conflicts of interest by product and service type
Firms may want to consider developing a conflict of interest register if one does not already exist. A
comprehensive catalog could include all conflicts of interest of which the Firm is aware and answer the
following questions:
o To which products or services does the conflict apply?
o What is the type of conflict (e.g., client vs. client, Firm vs. client, financial consultant vs. client,
financial consultant vs. Firm)?
o Is the conflict at the Firm- or RR or financial advisor-level, and how does the Firm categorize such
conflicts?
o Is the conflict considered material or immaterial? Might this vary depending on the product?
o What Firm-level (including its affiliates) revenue streams and RR or financial advisor-level
compensation and incentives are associated with the conflict?
o Is the conflict being mitigated? What controls and testing are in place to mitigate such a conflict?
If the conflict is not currently being mitigated, is it possible to mitigate or eliminate the conflict?
o If the conflict cannot be mitigated or eliminated, is it an acceptable conflict for the Firm?
o How complex is the conflict, and how well do impacted customer segment(s) understand the
conflict?
o What is the description of the conflict, including the related incentive or disincentive and other
material facts?
o What is the driver of the conflict and how is it appropriately managed?
o Is the conflict appropriately disclosed?
Policies and procedures regarding conflicts of interest may also be considered, including:
o The frequency of review of existing conflicts of interest;
o A method of review of existing conflicts of interest;
o A process for reviewing and adding conflicts of interest to new products and services;
o A process for reviewing cross-functional conflicts between business functions or business lines;
o A process for evaluating conflicts of interest when a product or service is changed, or there is a
business event (e.g., the Firm acquires another Firm or enters a new market); and/or
o How internal and external audiences are notified/updated when conflicts of interest are updated
or modified.
Policies and procedures around conflicts of interest for products and services may be reviewed in light of
the Reg BI Rule Package, including both conflicts considered to be material and non-material. The current
process for identifying, reviewing, mitigating or eliminating, and disclosing conflicts of interest should be
evaluated for compliance with the Reg BI Program requirements and identification of gaps. A resource or
master list of potential conflicts of interest that may apply to any product or service could also be created
for reference. For additional information regarding conflicts of interest, please see Section 6 of this Guide.
3.2.4. Titles used to describe financial advisors
20
When leveraging the term “advisor” or “adviser” to describe financial advisors or for other purposes, Firms
should consider an evaluation of whether the term(s) are appropriate to continue using under the
Disclosure Obligation of Reg BI. This may be facilitated by a thorough understanding of where the term is
used and in what context. Potential places such terms(s) may be found include but are not limited to:
20
Firms may also need to consider the impact of state regulation on the usage of such titles (e.g., New York).
30
o Marketing materials;
o Disclosures;
o Customer agreements;
o Websites; and/or
o Titles and job descriptions (e.g., on business cards).
3.2.5. Compensation and incentive models
Compensation programs and incentive models may benefit from a review to identify potential instances
where the Firm or an Associated Person may be incentivized to place its own interests ahead of the interests
of the customer and/or make a recommendation that is not in the best interest of the customer. Analysis
of compensation and incentive models might consider:
o Product (e.g., affiliated vs. non-affiliated, security type, issuer, share class)
o Account type (e.g., brokerage, advisory, or annuity, retail vs. retirement, IRA type)
o Source (e.g., 401k rollover proceeds)
When evaluating compensation and incentive models, Firms might map each element of monetary and
non-monetary compensation back to the Firm’s conflicts of interest register. Firms also might consider
evaluating if such conflicts become more acute or probable under certain circumstances (e.g., at the
beginning or end of a fiscal year or near incentive plan thresholds).
Attention should be paid to compensation and incentive models and programs that encourage the sale or
promotion of any one specific product or service during a limited time period, such as those that may exist
during initial public offerings (“IPOs”), closed-end fund launches, or sales contests.
3.3. Potential Business Changes
Should Firms decide to conduct any such impact analysis, the Firm might consider potential changes that
need to be made in response to such impact analysis and an assessment of Reg BI Program requirements.
The decisioning process may be an iterative one, as decisions made in one area may have implications for
other areas. For example, the elimination of a conflict of interest may require additional decisioning on
product types to offer or changes to revenue and compensation models. It is important, therefore, to
consider the benefits of a cross-functional approach to the decision-making process. Decision areas for
consideration may include:
(1) Products and Services: Will the Firm make changes to the types of products and services offered or
recommended? Changes to products and services could include:
o Removing products and services from the shelf where conflicts cannot be sufficiently disclosed,
eliminated, or mitigated and determining how to address existing investors in or shareholders
of these products and services; and
o Limiting access to certain products or services as part of conflicts of interest mitigation efforts
or more clearly defining to what customer segment(s) and under what circumstances such
products and services may be offered or sold;
(2) Business Structure: In what structure (e.g., a Broker-Dealer, an RIA, a dual Registrant or a Hybrid
Firm), will the firm offer its products and services, understanding the impact of Reg BI Program
requirements on each registration type? For example, a Broker-Dealer may decide to eliminate
certain services, such as portfolio monitoring, and may decide to launch an RIA as an alternative
structure under which to offer these services.
31
If contemplating a dual Registrant structure, a firm may change under which registration various
customer interactions are covered, including when one interaction may potentially fall under
multiple registrations (e.g., such as when a recommendation is made to a customer to move from
a brokerage to an advisory account). Firms may also wish to consider how these conversions will
be tracked, monitored, and disclosed for compliance purposes.
Another decision point for Firms whose Associated Persons use the term “advisor” or “adviser” is
whether or not they will choose to continue to do so under Reg BI.
21
(3) Revenue Models: Will the Firm make changes to its business and revenue models? Potential
changes may include the elimination of certain revenue streams associated with conflicts of
interest that would be overly costly to effectively mitigate and disclose. This might, for example,
include revenue-sharing or referral arrangements. The Firm may also decide to identify certain
revenue streams for higher-growth rates under the Reg BI Program. Firms may wish to consider
identifying these strategic work streams and also accounting for them when making compensation
and incentive model decisions.
(4) Conflicts of Interest: What kinds of conflicts will the Firm preserve and mitigate or disclose vs.
eliminate? For those conflicts of interest that the Firm determines cannot be mitigated or
eliminated and are not acceptable to the Firm, it should determine a strategy to remove those
conflicts. For example, if the conflict is product or services related, a Firm might consider assessing
the implications of removing such conflict from the offering and determine how to address current
investors in and shareholders of the products and services to be eliminated. In other words, will
the customers be required to:
o Close the position?
o Convert or transfer to another product? or
o Be allowed to hold such position but not add to the holding?
22
(5) Compensation and Incentives: After reaching an understanding of the various types of
compensation and incentives that may be paid to financial advisors and reviewing instances where
an RR or financial advisor may be incentivized to sell a particular product that could potentially be
viewed as not in a customer’s best interest, Firms may wish to consider what changes would be
required in order to sufficiently mitigate such a conflict. Examples of potential changes relating to
retail customers include:
o Eliminating or modifying sales contests that emphasize certain product or service sales during
specified time periods;
o Aligning compensation for similar product types;
o Reviewing and possibly modifying or eliminating the terms under which limited time products
are able to be promoted or sold;
o Restricting or eliminating certain share classes for mutual funds;
o Aligning compensation and incentives for promoting and selling proprietary products vs. those
offered by third parties; and/or
o Modifying the product offering shelf to support these efforts.
21
See footnote 18 regarding state requirements for the use of such terms and titles.
22
In this instance, the Firm will also need to consider its responsibilities to its customers who continue to hold the product or service.
32
3.4. Changes to Operations
The Firm may need to design changes to current-state operations to support the implementation of the
Reg BI Program and to enforce compliance. Firms may consider establishing a program structure with work
streams to identify gaps in current-state operations and to design such changes. Examples of work streams
could include:
(1) Project Management/PMO: Responsible for developing a coordinated plan to design changes to
operations, inclusive of managing communications across work streams and identifying
interdependencies. This function may also track overall progress, and report and escalate key
issues and decisions to senior leadership.
(2) Compliance: Responsible for identifying gaps and designing changes to the compliance
infrastructure for Reg BI Program compliance (e.g., changes needed to compliance policies and
procedures to meet the Disclosure, Care, Conflicts of Interest, and Compliance Obligations).
(3) Supervision: Identifies gaps and changes required to the existing supervisory function to support
rule compliance and the strategic decisions of the Firm (e.g., changes to systems and processes
required to review and approve recommendations against a “best interest” standard).
(4) Customer experience: Evaluates how to redesign and enhance the customer experience under the
Reg BI Program, including the redesign of key processes, such as customer onboarding, rollovers
and account type changes. This work stream should consider the experience of new and existing
customers as well as the customer’s digital experience.
(5) Financial advisor experience: Evaluates how to redesign processes related to regular activities of
financial advisor (e.g., customer prospecting, customer onboarding and the making of
recommendations). Redesign efforts considering how to streamline and automate these processes
could help boost financial advisor satisfaction and retention during Reg BI Program implementation
and during the post-implementation operating state.
The above work streams are representative only and not meant to be comprehensive. The number and
nature of work streams will vary, depending on the business model and the business decisions that the
Firm has decided to make in response to its Reg BI Program implementation. Although there is no single
approach to designing the target-state model, it is encouraged that all Firms understand the impact of Reg
BI Program requirements on their current operating model, identify gaps in the current-state model, and
design a target-state model that both supports compliance and business decisions made in response to Reg
BI Program requirements.
Reg BI Program requirements could potentially impact various workstreams. As an example, the below
matrix considers the impact of the Conflict of Interest Obligation requirements across the example
workstreams provided above. Note that this matrix may not hold true for all Firms.
33
Figure 7: Level of impact to a Firm’s workstreams due to Reg BI Program requirements
3.5. Customer Life cycle
Firms may wish to evaluate the customer life cycle to help identify impacts of Reg BI Program requirements
on current-state operations and the customer experience. This exercise may prove to be an effective way
for a Firm to confirm that it has assessed the impacts and identified the required changes needed to be
made across the life cycle. The below graphic provides an illustrative example of how a Firm might
categorize the customer life cycle into phases and identifies potential impact points for consideration in
each phase (e.g., customer education vs. providing investment advice, if and when recommendations are
made during the pre-onboarding phase). Firms may also wish to consider the impact of different means
through which customers and potential customer interactions occur, including telephonic, digital (e.g.,
email, website, social media) and individual or group in-person meetings.
34
Figure 8: Customer life cycle
35
4. Disclosure Obligation
Reg BI’s Disclosure Obligation requires Broker-Dealers to provide to retail customers
23
, prior to or at the
time of the recommendation, in writing, full and fair disclosure of all material facts related to the scope and
terms of the relationship and all material facts relating to conflicts of interest that are associated with the
recommendation.
Disclosure under Form CRS provides succinct information about the relationships and services the Firm
offers to retail customers, fees and costs that retail customers will pay, specified conflicts of interest and
standards of conduct, and the disciplinary history of the Firm, among other things. While Form CRS is an
initial layer of disclosure, the Disclosure Obligation (under Reg BI) builds upon the disclosures made in the
Form CRS.
This section is intended to identify key elements of disclosure requirements under Form CRS and the Reg
BI Disclosure Obligation, specifically:
(1) Disclosure requirements that Registrants need to provide to retail customers to comply with the
SEC’s Form CRS requirement, and with respect to RIAs, amendments made to Form ADV;
(2) Disclosure requirements that Broker-Dealers or natural persons who are Associated Persons of the
Broker-Dealer need to provide to retail customers to comply with the SEC’s Disclosure Obligation
under Reg BI
(3) Delivery format and content of disclosures made to retail customers for both the Form CRS and the
Disclosure Obligation (particularly the electronic delivery of such disclosures)
(4) Layered disclosures, the use of hyperlinks, and other means of facilitating access to additional
information
(5) The timing and frequency of providing disclosures and the tracking of delivery for such disclosures
(6) A representative process to provide additional disclosure when any previously provided
information becomes materially inaccurate or new, relevant material information become
available
(7) The process of filing the Form CRS with the SEC
4.1 Reg BI Disclosure Obligation
4.1.1. Disclosure Requirements of Reg BI
Broker-Dealers are required to provide specific disclosures under the Disclosure Obligation of Reg BI. Firms
are encouraged to read the Reg BI adopting release to understand the specific examples provided by the
SEC and to determine how these examples and such guidance might apply to their businesses.
1. Material facts regarding the scope and terms of the relationship
The minimum material facts of the scope and terms of the relationship to be disclosed include:
23
Refer to “Definition of Retail Customer”, Reg BI adopting release. 2019.
36
A. Disclosure of capacity in which the Broker-Dealer is acting with respect to the recommendation
The disclosure should indicate in what capacity the Broker-Dealer or natural person who is an
Associated Person of the Broker-Dealer is acting with respect to the recommendation. For example, in
the case of a dually-registered Associated Person of a dual Registrant or Hybrid Firm, the individual
must disclose in what capacity he or she is acting when making a recommendation (in the case of a
Broker-Dealer RR) or providing investment advice (in the case of an IAR). In other words, the individual
must disclose which hat he or she is wearing. Additionally, an Associated Person of a dual Registrant
who does not offer investment advisory services is required to disclose this fact as a material limitation
to such services in order to satisfy the Disclosure Obligation. Generally, the Associated Person is able
to rely upon the disclosures provided by the Firm unless additional disclosure is necessary.
Broker-Dealers also need to address the following in their disclosure:
o Capacity in the context of names and titles (discussed below); and
o Capacity in the context of marketing communications.
The Broker-Dealer may state that it provides “advice” or other such similar statements in its marketing
communication, but the statements should not be made in a manner that contradicts the disclosures
made in accordance with Reg BI and Form CRS requirements and should be reviewed with care
considering the solely incidental interpretative guidance provide by the SEC as part of the rule package
it released in June 2019.
24
Usage of the terms “adviser” and “advisor”
25
As described in the Reg BI adopting release, the SEC recognizes that Broker-Dealers sometimes use the
terms “adviser” and “advisor” to reflect a business of providing advice other than investment advice to
retail customers; however, the SEC also notes that there is a presumption of a violation to the
Disclosure Obligation should such usage be inappropriate, and/or create confusion for retail
customers.
26
The SEC, however, also notes that in certain circumstances where a Broker-Dealer provides advice in
other capacities outside the context of investment advice to a retail customer and where there is
compelling claim to the usage of the terms “adviser” and “advisor”, Firms and their financial advisors
may use the terminology in their discretion. For example, when a Broker-Dealer acts on behalf of a
municipal adviser or a commodity trading adviser, the Firm acts in distinct advisory roles, specifically
defined by federal statute and which does not entail providing investment advisory services.
27
Broker-
Dealers are encouraged to employ care and diligence when they choose to exercise the discretionary
usage of the terms “adviser” or “advisor” in such circumstances.
Considerations for usage of titles
1. Existing designations: Broker-Dealers and dual Registrants may wish to consider reviewing their
existing designation policy to ensure that the use of the term “adviser” or “advisor” for
24
Reference to “Commission Interpretation Regarding the Solely Incidental Prong of the Broker-Dealer Exclusion from the Definition of Investment
Adviser”.
25
Please refer to the SEC Small Entity Compliance Guide, 2019 for additional information about the SEC considerations of a presumed violation
for the improper usage of these terms.
26
See Reg BI adopting release. Pages 158, 531. 2019.
27
See Reg BI adopting release. Page 158. 2019.
37
Associated Persons that are neither registered as an IAR nor supervised by an RIA is in
accordance with the limited circumstances allowed by the Disclosure Obligation as set out in
the adopting release.
2. Marketing and media: The aforementioned requirements may compel Broker-Dealers to
reassess and evaluate names, titles, and leading statements that are used as part of
communications and sales practices across various media such as the company websites,
collateral marketing materials, and in-person or telephone conversations.
3. Third-party communication: Broker-Dealers may work with third-parties or have revenue-
sharing arrangements with third-parties (e.g., referral agreements, solicitation agreements) for
managing customer investments. Broker-Dealers may wish to review and establish controls as
to how they are represented to retail customers by such third-parties. Manufacturers and
distributors may need to consider reassessing the communication materials they provide to
third-parties for use with their customers, whereby such third-parties may be affected by
limitations on the usage of the terms “adviser” and “advisor”.
4. Other titles: Broker-Dealers may also consider re-evaluating the usage of terms that are
synonymous with the terms “adviser” and “advisor.” For example, labels such as “wealth
manager” and “financial consultant” have the risk of improperly suggesting an advisory-type
relationship when the Firm is not operating in an advisory capacity.
B. Disclosure of material fees and costs
Broker-Dealers should considering building upon the material fees and costs identified in the Form
CRS
28
and provide additional details that clearly convey the reason a fee is being imposed (i.e., the
“why”) and the timing of the fee charged (i.e., the “when”), including any triggering events (e.g., a fee
being imposed because an account minimum falls below a certain threshold) and whether fees may be
negotiable or waivable. Broker-Dealers are not required to provide personalized fee disclosure to each
retail customer. Instead, material facts about fees and costs in terms of more standardized numerical
and narrative disclosures, such as standardized or hypothetical amounts, dollar or percentage ranges,
and explanatory text would satisfy the requirement.
29
The disclosure requirements around fees and costs would likely compel Broker-Dealers to perform a
review of their fee arrangements and maintain a repository of the most current fee agreements,
disclosure agreements, and account agreements, along with any such amendments.
C. Disclosure of the type, scope and terms of services provided
Broker-Dealers are required to build upon their disclosure in the Form CRS
30
and provide additional
information regarding the types of services and the scope of services under the Disclosure Obligation.
Generally, an Associated Person of a Broker-Dealer may rely on the Broker-Dealer’s Form CRS
disclosure but may be required to provide additional disclosure. For example, an Associated Person of
a dual Registrant who does not offer investment advisory services must also disclose this fact as a
material limitation.
31
28
Reference to Section II.B.3 “Summary of Fees, Costs, Conflicts, and Standard of Conduct” of Form CRS adopting release. 2019.
29
See Reg BI adopting release. Page 168. 2019.
30
Reference to section II.B.2 “Relationships and Services” of Form CRS adopting release. 2019.
31
See Reg BI adopting release. Page 179. 2019.
38
Broker-Dealers also need to address the following in their disclosure:
o Frequency and duration of services;
o Account minimums or similar requirements;
o Material limitations on the securities or investment strategies involving securities that may be
recommended to the retail customer (e.g., if the Broker-Dealer only recommends proprietary
products); and
o Whether the Firm monitors the retail customer’s account and the scope and frequency of any such
account monitoring services.
Broker-Dealers would likely need to put in place a formal process for periodic review of their product
portfolio and ensure that product changes are documented. New securities that are to be incorporated
into the portfolio may also need to go through a process to identify and document any potential
proprietary product conflicts. This can be done at the Firm level for product shelf prior to the RR level
in certain instances depending on the business model.
D. Disclosure of other material facts related to the scope and terms of the relationship
Material facts relating to the scope and terms of the relationship, other than those mentioned above,
must also be disclosed. Some examples of other material facts include:
o The general basis for the Broker-Dealer’s or an Associated Person’s recommendation (i.e.,
investment approach, philosophy, or strategy) to retail customers;
o Circumstances when the standardized disclosure does not apply and how the Broker-Dealer will
notify the customer in such cases (e.g., if an Associated Person of Broker-Dealer has a different
approach);
o Material facts related to the risk associated with the recommendation in standardized terms; and
o Product-level risks in standardized terms, with additional information on any available issuer
disclosure documents.
2. Material facts regarding conflicts of interest
A “Conflict of interest” associated with a recommendation is defined as “an interest that might incline
a broker, 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.”
32
The conflicts of interest
identified in Form CRS
33
may provide a useful starting point for the identification of material facts
related to the recommendation.
Broker-Dealers also need to disclose material facts regarding conflicts of interest associated with:
o Compensation for recommendations, including the sources and types of compensation
received in a standardized format or particularized disclosure;
o Variable compensation schemes associated with recommending a more expensive product
(that has higher compensation for the Broker-Dealer) than a less expensive alternative; and
o Recommendation of proprietary products.
34
32
Refer to definition of “Conflict of Interest”, Reg BI adopting release. 2019.
33
Reference to Section II.B.3 “Summary of Fees, Costs, Conflicts, and Standard of Conduct” of Form CRS adopting release. 2019.
34
See Reg BI adopting release. Pages 208-209. 2019.
39
Broker-Dealers would likely need to review their existing policies and procedures to identify areas that
could cause a potential conflict of interest to arise. Some of the topics to review could include tracked
performance metrics, commission grids, sales breakpoints, incentives, bonuses, non-cash
compensation, (e.g., the performance scorecard may incentivize managers to limit money moving out
of proprietary products to increase the profitability of the company; transaction-based compensation
policy could incentivize Broker-Dealers to trade more frequently, thereby, raising questions of
“churning”).
Delivery Format and Content
Reg BI requires Broker-Dealers to make disclosures, in writing, to retail customers, before or at the time
of the recommendation. The Rule is meant to make it easier for the customers to understand these
disclosures and hence, the Firm might want to consider the use of graphics, pictures, tabular
representations, etc. in their written disclosures as opposed to simply creating another document for
customers to read. The disclosures are required to be concise, clear, and understandable so that they
promote effective communication between a Broker-Dealer and a retail customer. The disclosure
documents could be in paper or electronic format, provided that prior consent for electronic delivery
has been obtained from retail customers. Also, in certain circumstances as discussed below, the SEC
staff notes the permissibility of oral disclosure and follow-on disclosure after a recommendation is
made.
4.1.2 Oral disclosure
Oral disclosure may be made, no later than the time of a recommendation, to supplement facts that were
not reasonably known at the time the written disclosure was made. However, a record of the fact that oral
disclosure was provided should be maintained (e.g., oral disclosure on the actual capacity of the
relationship can be provided at the time of recommendation if the written disclosure was generic in nature.
As an example, “All recommendations will be made in a Broker-Dealer capacity unless otherwise expressly
stated.” Firms might wish to consider to what extent (if at all) they will permit the usage of oral disclosures.
Such decisions will come with additional considerations of risk and operational impact (e.g., how such
disclosures will be supervised and evidenced).
4.1.3 Disclosure after recommendation
35
Providing disclosure to a retail customer after the recommendation is made is permitted in certain limited
circumstances (e.g., delivery of a product prospectus or a trade confirmation, after the execution of the
trade).
36
However, an initial disclosure in writing that identifies the material fact and describes the process
through which such facts may be supplemented or updated post a recommendation should be provided to
the retail customer.
The Firm might rely on multiple communication channels like phone, mail, email, or personalized account
portals on the website to deliver the required disclosure. However, from a compliance and cost standpoint,
delivering disclosure electronically might be the most efficient option for Firms to consider. Firms which
35
Please refer to the SEC Small Entity Compliance Guide, 2019 for additional information as to what is required for Firms when delivering
disclosures after the recommendation is made.
36
See Reg BI adopting release. Page 239. 2019.
40
employ robo-advisors, investor questionnaires, and other such online tools to make recommendations may
need to consider the appropriateness of their disclosures given Reg BI and Form CRS requirements. For
example, Firms may need to reconsider the timing and order of required disclosures throughout the
customers’ website experience to ensure that the timing and delivery obligations for the Form CRS and
other such disclosures are satisfied.
Broker-Dealers are encouraged to conduct a pros and cons assessment of a single omnibus (i.e.,
standardized) disclosure vs. situational (i.e., individualized) disclosures. Broker-Dealers may choose to
standardize certain forms of their disclosure, but whether such standardized disclosure will satisfy the
Disclosure Obligation will depend on the facts and circumstances. Disclosures may need to be tailored to a
particular recommendation if the standardized disclosure does not sufficiently identify the material facts
about a conflict of interest (e.g., conflicts about a specific proprietary product or conflicts that arise out of
a relationship with an affiliated third-party might be covered within a standardized disclosure).
4.1.4 Layering approach
Layered disclosure is permissible, in which more general information is supplemented by more detailed
information provided either at the same time or subsequently. However, the total disclosures should
constitute full and fair disclosure of the information required by the Disclosure Obligation and Form CRS.
Firms may wish to consider the impact on the customer experience when delivering disclosures through a
layering approach, such that the customer has all the relevant and required information while at the same
time not being overburdened with redundant information. The Disclosure Obligation under Reg BI can be
met using existing documents provided to retail customers or a combination of such documents (e.g., such
as account opening documents, product prospectuses, relationship guides, account agreements, fee
schedules, or other standalone documents). Existing documents may need to be reviewed to determine if
additional information is required to be disclosed given the Reg BI and Form CRS requirements. Firms may
also consider consolidating and packaging all required documents which a retail customer receives or
leveraging or otherwise cross-referencing existing documents to fulfill the Disclosure Obligation.
Below are examples of the advantages and disadvantages of each suggested approach to fulfilling the
delivery requirements for disclosures. Broker-Dealers are encouraged to conduct a cost-benefit assessment
to determine the appropriateness of any such approach for their business model, whether through a new
disclosure, the use of a layered approach, or a hybrid between the two.
Table 6: Approaches for Reg BI Disclosure – Pros & Cons
Approach
Pros
Cons
New
Disclosures
•
Comprehensive package newly created
to ensure compliance
• Low monitoring overhead as compared
to using existing disclosures
•
Initially labor-intensive and time-consuming
• Could be expensive as dedicated full-time
employee might be required
Layering
• Leveraging existing disclosures lends to
incremental nature of the effort and
results in time savings
• Potential cost savings in delivery
• Maintaining consistency among disclosures
• Monitoring required to ensure compliance
across multiple sources
41
Hybrid
Approach
•
May be more cost effective than
creating new disclosure materials
•
The added cost and effort to create a new
core disclosure
4.1.5 Timing, frequency, and tracking of delivery
Timing and frequency:
The SEC has not adopted any prescribed requirements for the timing and frequency of written disclosures,
other than requiring Broker-Dealers to disclose to retail customers before or at the time of the
recommendation.
37
Tracking of delivery:
Broker-Dealers are required to deliver their disclosures to retail customers within the framework of the
SEC’s existing guidance regarding electronic delivery, and the following elements are required to be
satisfied with the delivery of disclosures to retail customers:
o Notice to the retail customer that information is available electronically;
o Access to information comparable to that which would have been provided in paper form and such
that is not so burdensome that the intended recipients can effectively access it; and
o Evidence to show delivery (i.e., a reason to believe that electronically delivered information will
result in the satisfaction of the delivery requirements under the federal securities laws).
4.1.6 Updating disclosure documents
Broker-Dealers must provide retail customers with updated disclosure when previously provided
disclosures become materially inaccurate or when new material information is available, including any
conflict of interest not disclosed prior. Typically, these updates should be made within 30 days after the
material change occurs or is otherwise identified.
38
Firms may wish to consider what is a reasonable basis
for review of their disclosures. For example, as other required disclosures require an annual or ongoing
review (e.g., the annual privacy notice; in the case of RIAs, filing of a Form ADV amendment for material
changes), Firms may consider incorporating such a review of Form CRS into these already established
processes. The Firm might also consider establishing a cadence to re-inform customers of updates and
changes to such disclosures as to minimize adverse impacts to the customer experience.
4.2 Form CRS Relationship Summary and Amendments to Form ADV
4.2.1 Disclosure Requirements of Form CRS
Form CRS is an initial disclosure intended to provide concise information to retail investors about the
relationships and services that Broker-Dealers and/or RIAs offer. Form CRS will need to be delivered to a
“retail investor”
39
by “Firms”
40
, which include sole proprietorships and other business organizations that
are registered under one, or both, of the below statutes:
37
See Reg BI adopting release. Page 217. 2019.
38
See Reg BI adopting release. Page 244. 2019. With respect to Form CRS delivery, see also Form CRS adopting release. Pages 24, 237. 2019.
39
Refer to “Definition of Retail Investor”, Form CRS adopting release. 2019.
40
Refer to footnote 4, Form CRS adopting release. 2019.
42
o An Investment Adviser under Section 203 of the Investment Advisers Act of 1940; or
o A Broker-Dealer under Section 15 of the Exchange Act.
For the purposes of Form CRS, a “dual Registrant” as defined in the adopting release
41
that does not offer
both brokerage and investment advisory services to retail investors would not fall within the definition of
dual Registrant.
42
As the filed Form CRS will be made publicly available, Firms may want to consider creating a screening
committee or other review process composed of professionals from legal and compliance teams to review
the disclosure to avoid any potentially misleading statements or omissions of material facts. Also, as noted
previously, some of the disclosure obligations under Reg BI could build upon the content available in the
Form CRS. In such cases, the Firm should ensure consistency between the additional material facts and
conflicts disclosed under Reg BI requirements and the information presented in the Form CRS. The Firm
may also want to entrust this responsibility to an appropriate authority like a conflicts officer or a conflicts
committee that serves in a similar capacity to ensure that processes are in place to resolve any
inconsistencies.
The layout for Form CRS is structured into five items. The key requirements for each of these five items are
summarized below. Please refer to the Form CRS Relationship Summary; Amendments to Form ADV
adopting release for specific instructions on how the Form CRS items must be disclosed:
43
41
Refer definition of “dual registrant” in Form CRS adopting release. 2019.
42
See Form CRS adopting release. Page 6. 2019.
43
It is important to note that specific cross-references to services must link back to information that is “same or equivalent” to information
required by Form ADV, Part 2A or Reg BI, as applicable. For RIAs, there are references to specific Form ADV, Part 2A items. See, Instruction 2.C.:
“Additional Information: Include specific references to more detailed information about your services that, at a minimum, include the same or
equivalent information to that required by the Form ADV, Part 2A brochure (Items 4 and 7 of Part 2A or Items 4.A. and 5 of Part 2A Appendix 1)
and Regulation Best Interest, as applicable.”
43
Figure 9: Form CRS layout
44
4.2.2 Amendments to Form ADV
The RIAs will be required to submit the Form CRS as Part 3 of their Form ADV filing. The SEC has provided
clarifications to help RIAs satisfy the requirements to update the Form ADV
44
and Form CRS. The options
available to RIAs are:
(1) File an amended Form CRS as an other-than-annual amendment within the 30 days required to file
the amendment; or
(2) Submit amended versions of the Form CRS required by Part 3 as part of their annual updating
amendment.
Table 7: Update frequency for Form ADV parts
Part of Form ADV
Frequency of update
Part 1 and 2
•
At least annually, within 90 days of the end of the fiscal year; and
• More frequently, if required by the instructions to Form ADV
Part 3
•
At the frequency required by the instructions to Form CRS (i.e. Form
ADV, Part 3)
It should be noted that RIAs will need to file Part 3 of their Form ADV with the SEC and deliver such
documents to retail investors in accordance with Form CRS instructions. The criteria for delivery of Part 3
differs from the delivery requirements of Form ADV Part 2 brochures. Hence, there may be situations in
which RIAs will need to deliver a copy of Part 3 to retail investors even if the situation does not warrant a
delivery of Part 2 brochures.
Please refer to Form CRS adopting release for additional information on Form ADV, Part 3.
4.2.3 Delivery format and content
Form CRS may be delivered in paper or electronic format. A Firm may wish to consider delivering the initial
Form CRS in a manner consistent with its existing arrangement with a retail investor and confirming that
any electronic delivery process is consistent with the SEC's electronic delivery guidance. Retail investors
may request a copy of the relationship summary in a format they prefer and are entitled to establish their
delivery preferences once they have entered into a relationship with a Registrant. If a Form CRS is delivered
electronically, it must be presented prominently in the electronic medium and must be easily accessible for
a retail investor. If the Form CRS is delivered in paper format as part of a package of documents to a retail
investor, Firms are required to ensure that the disclosure is the first among any documents that are
delivered at that time.
45
Firms may want to ensure that they have adequate data storage and accessibility capabilities to meet the
above requirements. In addition to having the technical capability, the Firm might also want to ensure that
standard operating policies and procedures for disclosure management and governance are established.
44
See General Instruction 4 to Form ADV (When am I required to update my Form ADV?): https://www.sec.gov/about/forms/formadv-
instructions.pdf
45
See Form CRS adopting release. Page 499. 2019.
45
A relationship summary in paper format must not exceed two pages, or the equivalent if delivered
electronically, for a Broker-Dealer, RIA, or affiliates that prepare separate summaries. Dual Registrants may
choose to prepare a single relationship summary having up to four pages for both their brokerage and
advisory services.
As described in the adopting release, affiliates are permitted to prepare a single relationship summary
describing both brokerage and investment advisory services that they offer or to prepare separate
relationship summaries, one for each type of service. If two affiliated SEC-registered Firms prepare separate
relationship summaries, and they provide brokerage and investment advisory services through dually-
registered professionals, they are required to deliver both entities’ relationship summaries with equal
prominence and at the same time, without regard to whether the particular retail investor qualifies for
those retail services or accounts. The adopting release notes that each of the relationship summaries must
cross-reference and linked to the other. If the affiliated Firms are not providing brokerage and investment
advisory services through dually registered professionals, they may choose whether or not to reference
each’s relationship summary and whether or not to deliver the affiliate’s relationship summary with equal
prominence and at the same time.
46
The Form CRS must be concise and direct and written in plain English to take into consideration retail
investors’ level of financial experience. Legal terms that impede the retail investors’ understanding of
material information are discouraged.
47
Firms also need to ensure that the Form CRS adheres to certain characteristics, such as having standardized
headings in the form of questions, prescribed conversation starters, as well as electronic and graphical
features to furnish information. These filings are required to be in a text-searchable format and to be
structured with machine-readable headings. The machine-readable, structured headings will facilitate the
SEC’s and other regulators’ ability to analyze and compare specific items of the relationship summary across
Firms for the benefit of retail investors.
48
Considerations for delivery of Form CRS
(1) Firms may consider providing additional training and standardized response guide for Associated
Persons so that they are better equipped to have conversations with retail investors and are aware
of the prescribed conversation starters questions within Form CRS. Firms may also consider having
processes and supervision in place to ensure consistency in the responses of Associated Persons
while having these conversations with retail investors.
(2) Dual Registrants may consider the following options to fulfill Form CRS obligations:
o Preparing separate Form CRS documents for their brokerage and advisory services, each of
which not to exceed two pages;
o Preparing a single Form CRS for their brokerage and advisory services in which two pages are
dedicated to brokerage services and two pages for advisory services, and the document does
not exceed four pages;
46
For additional information regarding dual Registrants and dually-registered professionals, please see Appendix B of the Form CRS adopting
release. Page 5. 2019.
47
For additional information about the usage of plain English, please see the SEC’s Office of Investor Education and Advocacy: A Plan English
Handbook.
48
See Form CRS adopting release. Page 21. 2019.
46
o Preparing a single Form CRS with commingled language for both brokerage and advisory
services under each section, again, not to exceed four pages. The Firm may consider presenting
the information in a tabular format, with brokerage services described in one column and
advisory services described in another in order to distinguish clearly between the brokerage
and advisory services offered by the Firm and to facilitate a comparison by the retail investor
should this option be considered.
o Regardless of the format selected, the disclosure must “facilitate comparison” by the retail
investor between the two types of services.
49
(3) In addition, prior to June 30, 2020, Firms may consider notifying their existing retail customers to
indicate that they will soon be receiving Form CRS disclosures and to educate them on the purpose
of such disclosures in order to minimize any potentially adverse operational impacts given
customer responses (e.g., call volume increase due to retail customers’ questions).
50
4.2.4 Layering approach; using links
The Form CRS is intended to be an initial layer of disclosure for retail investors and contain high-level
information that retail investors would be more likely to read and understand while having the means to
access more detailed information. Firms may cross-reference other documents and use hyperlinks or other
tools to give additional information about such topics as well. However, this additional information may
not substitute the narrative descriptions required in the Form CRS disclosure.
4.2.5 Timing, frequency, and tracking of delivery
Compliance Timeline
Broker-Dealers and RIAs must electronically file their relationship summary with the SEC, by the below
timelines.
Table 8: Dates for filing relationship summary with the SEC
SEC registration status
Dates for filing relationship summary with the SEC
Broker-Dealers
Registered with SEC as a Broker-Dealer, before
June 30, 2020
Beginning on May 1, 2020, and by no later than June
30, 2020
Has an application for registration or have an
application pending with the SEC as a Broker-
Dealer on or after June 30, 2020
On or before the effective date of registration
RIAs
Registered or have an application for registration
pending with the SEC as an RIA, before June 30,
2020
Beginning on May 1, 2020, and by no later than June
30, 2020
49
See Form CRS adopting release. Page 23. 2019.
50
Firms may wish to consider this option as part of their change management and communication strategy outlined in Section 2: Program
Governance.
47
SEC registration status
Dates for filing relationship summary with the SEC
Has an application for registration with the SEC as
an RIA on or after June 30, 2020
Date of application for SEC registration (Initial
application should include a relationship summary)
Firms are also required to begin delivery of their relationship summary (i) to new and prospective retail
investors from the date by which they are first required to electronically file their relationship summary
with the SEC, and (ii) to all their existing retail investors, on an initial one-time basis, within 30 days of the
date of the SEC filing.
Initial delivery obligations to new or prospective retail clients
The initial delivery of the relationship summary to new or prospective retail clients is governed by a set of
delivery triggers. A Firm must deliver its current Form CRS, before or at the earliest of the triggers listed
below.
Table 9: Triggers for initial delivery of Form CRS
Firm Type
Form CRS Delivery Triggers
Broker-Dealer
• A recommendation of an account type, a securities transaction; or an investment
strategy involving securities;
• Placing an order for the retail investor; or
• The opening of a brokerage account for the retail investor
RIA
The time of entering into an investment advisory contract with the retail investor, even
if their agreement with the retail investor is oral.
Dual Registrant
At the earlier of the delivery trigger for either Broker-Dealers or investment advisers
Considerations for prospective clients
(1) Firms may need to scrutinize their lead generation programs and processes to ensure that no
recommendation is made prior to the delivery of Form CRS to prospective retail investors.
Conversely, controls may need to be implemented over multiple client communication channels
(e.g., email, website, in-person, and telephone conversations). Firms may wish to emphasize the
delivery and importance of Form CRS, in telephone conversations with prospective retail investors
and may consider delivering the Form CRS at the beginning of the prospecting process.
(2) Firms which provide automated advice services through their website may need to ensure that a
prospective retail investor agrees and consents to electronic delivery of the receipt of Form CRS
before any investment recommendations are displayed. Firms may choose to employ customer
agreement checkboxes, pop-up notifications, or prominent hyperlinks to direct a retail investor to
read the Firm’s Form CRS before any automated advice is delivered. Additionally, Firms will need
to consider how they document the timestamps and delivery dates of such actions in order to
evidence compliance with the requirements of the rules.
48
Frequency of re-delivery of Form CRS relationship summary for existing clients
Registrants are required to deliver the most recent version of the Form CRS to each retail investor who is
an existing customer, before or at the time a Firm:
o Opens a new account that is different from the retail investor’s existing account(s);
o Recommends that the retail investor roll over assets from a retirement account into a new or
existing account or investment; or
o Recommends or provides a new brokerage or advisory service or investment that does not
necessarily involve the opening of a new account and would not be held in an existing account.
In addition to the above, the current Form CRS is required to be delivered to each retail investor within 30
days upon request.
Since Firms have the flexibility to tailor the delivery frequency of Form CRS, they may want to consider
different approaches to designing the delivery process for Form CRS. Firms may lean towards a conservative
approach and deliver Form CRS at regular intervals to existing clients (for example, as the first document
within monthly or quarterly statements bundled). Additionally, Firms might also wish to incorporate system
or process triggers to initiate any off-cycle delivery of Form CRS whenever a triggering event (e.g. new
account opening) occurs. Lastly, Firms may also choose to establish system and process controls to verify
the evidence for delivery of the most recent version of Form CRS before any new recommendation of
brokerage or advisory service or investment is made to a retail investor or when an updated Form CRS is
required to be sent to retail investors.
Tracking of delivery of Form CRS relationship summary
Firms are required to deliver the Form CRS to their retail investors as outlined by the SEC’s existing guidance
regarding electronic delivery. The following examples are provided in the SEC’s guidance and may be used
to satisfy the evidence requirements under Form CRS delivery obligations:
51
o Obtaining the intended recipient’s informed consent for delivery through a specified electronic
medium, and ensuring that the recipient has appropriate notice and access;
o Obtaining evidence that the intended recipient received the information, for example, via
electronic mail return-receipt or by confirmation that the information was accessed,
downloaded, or printed; and/or
o Disseminating information through certain facsimile methods.
Whether using paper or electronic media, Firms might want to consider establishing audit trail procedures
to ensure that applicable delivery obligations are met. From a recordkeeping perspective, Firms may want
to ensure that their existing systems have the capabilities to enter, preserve, and extract a record of the
date on which each Form CRS was delivered to any retail investor or prospective retail investor.
52
Firms
may also wish to reassess that their communication channels for delivery are aligned with the preferences
of their retail investors. Firms may need to implement systems and processes to track retail investors who
51
See Evidence to Show Delivery. https://www.govinfo.gov/content/pkg/FR-1996-05-15/pdf/96-12176.pdf
52
See Section 8: Recordkeeping requirements of this Guide for more information.
49
have consented to e-delivery of Form CRS and to track retail investors who opt for paper delivery of Form
CRS, if these capabilities for tracking retail investors’ preferences do not already exist.
4.2.6 Updating disclosure documents
Firms are required to update, file amendments to, and re-deliver the Form CRS whenever the disclosure
becomes materially inaccurate. Firms are required to communicate the updated information without any
charges to retail investors as described in the adopting release. The figure below illustrates a representative
timeline for updating the Form CRS and the periods within which Firms are required to file or deliver
updates to existing clients or customers:
Figure 10: Timeline for updating Form CRS
As described in the SEC Form CRS adopting release, there is a requirement for “firms to update their
relationship summary within 30 days whenever the relationship summary becomes materially
inaccurate”
53
and “the rules as adopted will allow firms to communicate information in an amended
relationship summary to retail investors who are existing clients or customers within 60 days after the
updates are required to be made…”
54
53
See Form CRS adopting release. Page 24. 2019.
54
See Form CRS adopting release. Page 237. 2019.
50
Table 10: Update requirements for Form CRS
Relationship
Summary Update
Requirement
Period for filing/delivery of the
update
Additional update requirements
SEC filing
To be updated and filed within 30
days, whenever any information in
the relationship summary becomes
materially inaccurate
• An exhibit highlighting the changes to
the relationship summary should be
included
Communication to
retail investors who
are existing clients
or customers
To be delivered within 60 days after
the updates are required to be
made to the relationship summary
• Updates can be delivered through an
amended relationship summary or
another disclosure.
• Most recent changes in each amended
relationship summary should be
highlighted and attached as an exhibit
to the unmarked amended relationship
summary
Filing of Form CRS
Broker-Dealers are required to file their relationship summary with the SEC by filing Form CRS electronically
through the Central Registration Depository (“Web CRD®”), operated by the Financial Industry Regulatory
Authority, Inc. (“FINRA”). RIAs are required to file their relationship summary with the SEC by filing Form
CRS electronically through the Investment Adviser Registration Depository (“IARD”). Dual Registrants are
required to electronically file their relationship summaries using both the IARD and the Web CRD®. The SEC
filed relationship summaries will be accessible to the public through Investment Adviser Public Disclosure
(“IAPD”) and BrokerCheck. If Firms have their own public website, they are required to prominently display
the single, joint, or separate FORM CRSes on their website.
51
4.2.7 Key Implementation Considerations from Section 4
Section 4 addressed requirements and implementation considerations for the Disclosure Obligation. Below
is a summary of implementation considerations from this section. These considerations are neither
exhaustive nor prescriptive; rather, they are representative of the types of considerations that a Firm may
find helpful as it designs and executes on its Reg BI Program requirements.
Figure 11: Section 4 implementation considerations
52
5. Care Obligation
When making recommendations, Broker-Dealers must exercise reasonable diligence, care, and skill to
evaluate the three components of the Care Obligation.
(1) Reasonable-basis: Broker-Dealers need to understand the recommended security or investment
strategy, as well as the potential risks, rewards, and costs associated with the recommendation
and have a reasonable basis to believe that the recommendation could be in the best interest of
at least some retail customers
(2) Customer-specific: Based on the understanding of the recommended security or investment
strategy and retail customer’s investment profile, Broker-Dealers need to have a reasonable basis
to believe that the recommendation is in the best interest of a particular retail customer and
does not place the Broker-Dealer’s interest ahead of the retail customer’s interest
(3) Quantitative suitability: Broker-Dealers need to ensure a series of recommendations, even if
viewed as in the customer’s best interest when viewed in isolation, should also be viewed in the
aggregate as not excessive and made in the best interest of the customer.
55
Broker-Dealer’s compliance with the Care Obligation would be evaluated based on the facts and
circumstances at the time of the recommendation (and not in hindsight).
Considerations for each of the three components of the Care Obligation are mentioned below.
5.1. Broker-Dealer’s understanding of particular security or investment strategy
(reasonable basis)
Factors that constitute reasonable diligence, care, and skill may vary depending on the complexity and
risks associated with the recommended security or investment strategy and the Broker-Dealer’s
familiarity with the recommendation. Broker-Dealers could consider the following non-exhaustive list of
factors when assessing a particular security or investment strategy:
o What is the security or strategy’s investment objectives?
o What are the characteristics (including any special or unusual features) of the security or
investment strategy?
o What are the initial and subsequent costs (if any, e.g., surrender or redemption costs) of the
security or investment strategy?
o How liquid is the security?
o What are the risks, volatility, and likely performance in a variety of market conditions (normal and
stressed)?
o What is the expected return of the security?
o What are the financial incentives to recommend the security or investment strategy?
o How is the security or strategy expected to perform during different market environments?
55
Please refer to the SEC Reg BI Small Entity Compliance Guide, 2019 for additional information.
53
Analyzing the above factors could allow Broker-Dealers to develop an understanding of the security or
investment strategy in order to reasonably believe that the recommendation could be in the best interest
of at least some retail customers.
5.1.1. Consideration for complex products
Broker-Dealers should establish heightened scrutiny while recommending complex products to retail
customers. Products considered complex or risky for retail customers may include the following:
o Inverse or leveraged exchange-traded products
o Penny stocks and thinly traded securities that have low liquidity
o Asset-backed securities that are secured by a pool of collateral
o Investments tied to stock market volatility
o Products that include an embedded derivative component
o Derivatives
o Highly leveraged products
Below are some supervisory procedures
56
for complex products that Broker-Dealers could consider:
(1) Approval of the sale of complex products: Broker-Dealers can have formal written procedures to
ensure that complex products are not recommended to a retail customer before it has been
thoroughly vetted.
(2) Post-approval review: Broker-Dealers can consider developing procedures to review how the
complex products performed after the Firm approved them.
(3) Training of Broker-Dealers: Associated Persons of a Broker-Dealer can be adequately trained to
understand not only the way a complex product is expected to perform in various market
conditions, but also to understand the risks associated with the product.
(4) Consideration of a customer’s financial sophistication.
(5) Discussions with customer: Broker-Dealers should discuss with the retail customer the features of
the product, how it is expected to perform under different market conditions, the risks and the
possible benefits, and the costs of the product.
(6) Consideration of less complex or costly products: Broker-Dealers should consider whether less
complex or costly products could achieve the same objectives for their customers.
The SEC has not placed any limit or restriction on recommending complex or higher-risk products if the
Broker-Dealer has a reasonable basis to believe that a recommendation could be in the best interest of at
least some retail customers and the Broker-Dealer has developed a proper understanding of the
recommended product or investment strategy.
5.2. Customer-specific recommendation
Customer-specific component of the Care Obligation requires Broker-Dealers to have a reasonable basis
to believe that the recommendation is in the best interest of the particular retail customer and to not
56
Refer to FINRA notice 12-03: https://www.finra.org/sites/default/files/NoticeDocument/p125397.pdf
54
place the Broker-Dealer’s interest ahead of the customer’s interest. Below are several examples where
Broker-Dealers may not be acting in the best interest of the retail customer:
o Recommending one product over another to receive a larger commission
o Recommending a product without understanding the potential risks and rewards associated with
the recommendation
o Recommending a mutual fund to maximize commissions rather than to establish an appropriate
portfolio for retail customers
o Recommending new issues that are pushed by Firms to meet sales targets
o Recommending speculative securities that pay high commissions
Broker-Dealers should consider the following to have a reasonable basis to believe that the
recommendation is in the best interest of the particular retail customer:
o Understand the retail customer’s investment profile
o Evaluate potential risks, rewards and costs (both initial and subsequent) associated with the
particular recommendation
o Consider reasonably available alternatives
o Understanding how the recommendation’s attributes align with the investor’s investment profile
5.2.1. Understanding of the retail customer’s investment profile
Important factors to consider while creating a retail customer’s investment profile
Broker-Dealers should exercise reasonable diligence to obtain and analyze enough customer information
to ascertain the retail customer’s investment profile. Firms should consider including, at a minimum, the
following in a retail customer’s investment profile
57
:
o Age
o Other investments
o Financial situation and needs
o Tax status
o Investment objectives
o Investment experience
o Investment time horizon
o Milestones
o Liquidity needs
o Risk tolerance
o Any other information the retail customer may disclose to the Broker-Dealer in connection with a
recommendation
Other relevant factors
Broker-Dealers can consider additional factors based on the unique facts and circumstances of each
recommendation. For example, when a Broker-Dealer making a variable annuity recommendation
believes that longevity risk is an important factor for a particular retail customer and that such factor is
57
Please refer to the SEC Reg BI Small Entity Compliance Guide, 2019 for additional information.
55
necessary to develop a reasonable basis to believe that the product is in the best interest of that retail
customer, then the Broker-Dealer should consider that factor.
5.2.2. Factors to consider when making recommendations to a particular retail customer
The factors that a Broker-Dealer could consider when making a recommendation may vary depending
upon the particular product or strategy recommended:
o Potential risks, rewards and costs of the particular recommendation.
o Costs associated with the execution of a strategy, which includes the purchase or redemption of
multiple securities, and any other costs such as deferred sales charges or liquidation costs.
Broker-Dealers can recommend more costly products, provided the Broker-Dealer has a
reasonable basis to believe it is in the best interest of a particular retail customer. Some
questions that the Firm may want to consider for implementation:
o Are there existing systems and data sources that enable the representatives to perform a
cost comparison?
o Are there standardized rules to guide representatives on how to weight cost when evaluating
a product vs. alternatives?
o Are there policies that define when a representative could exercise independent judgement
in recommending a costlier product?
o Additional factors could be considered depending on the particular security or investment
strategy being recommended and depending on the particular retail customer’s investment
profile. For example, prior to recommending a variable annuity to a particular retail customer,
Broker-Dealers could generally develop a reasonable basis to believe that the retail customer will
benefit from certain features of deferred variable annuities, such as tax-deferred growth,
annuitization, or a death or living benefit.
5.2.3. Consideration of reasonably available alternatives
Broker-Dealers need to consider reasonably available alternatives before making recommendations to a
particular retail customer. While conducting such an evaluation, a Broker-Dealer does not necessarily
have to conduct an evaluation of every possible alternative, nor is it required to recommend the single
“best” of all possible alternatives that might exist. A Broker-Dealer could reasonably limit the universe of
“reasonably available alternatives” if there is a sensible process or methodology for limiting the scope of
alternatives or the universe considered for a particular retail customer or particular category of retail
customers. To determine the scope for reasonably available alternatives Broker-Dealers could consider,
by way of example, the following factors:
o Broker-Dealer’s business model
o Associated person’s customer base (including the general investment objectives and needs of the
customer base)
o Investments and services available to the associated person to recommend (including limitations
due to licensing of the associated person)
o Specific limitations on the available investments and services with respect to certain retail
customers (e.g., product or service income thresholds; product geographic limitations; or product
limitations based on account type, such as those only eligible for IRA accounts)
56
5.3. Quantitative suitability (series of recommendations)
A series of recommendations (even if viewed as in the customer’s best interest when viewed in isolation)
should also be viewed in the aggregate as not excessive and made in the best interest of the customer.
58
What would constitute a series of recommended transactions would depend on the facts and
circumstances and would need to be evaluated with respect to a particular retail customer. Below are a
few indicators
59
of excessive trading that Broker-Dealers could consider when assessing a series of
recommendations:
o Turnover rate: Turnover rate is calculated by dividing the aggregate amount of purchases in an
account by the average monthly investment. The average monthly investment is the cumulative
total of the net investment in the account at the end of each month, exclusive of loans, divided
by the number of months under consideration
o Cost-to-equity ratio: Represents the percentage of return on the customer’s average net equity
needed to pay Broker-Dealer commissions and other expenses
o In-and-out trading: Refers to the sale of all or part of a customer’s portfolio, with the money
reinvested in other securities, followed by the sale of the newly acquired securities.
If a retail customer expresses a desire for active trading, a Broker-Dealer can take this element into
consideration when evaluating a recommendation; however, the Broker-Dealer will need to reasonably
believe that a series of recommended transactions is in the best interest of the retail customer.
5.4. Considerations for specific recommendation types
5.4.1.
Proprietary products and other limited menus of products and products with third-party
arrangements (e.g., revenue sharing)
A Broker-Dealer that materially limits its product offerings to certain proprietary or other limited menus
of products or third-party arrangements must comply with the Care Obligation—even if it has disclosed
and taken steps to prevent the limitation from placing the interests of the Broker-Dealer ahead of the
retail customer. Broker-Dealers should not use their limited menu to justify a product recommendation
that is not in a customer’s best interest.
Hence, Firms may wish to consider implementation of a process to periodically analyze the
competitiveness of its product shelf in terms of cost, return and risk to marketplace alternatives. This
would help the Firm to ensure that its product offerings are in line with the other options available in the
market. Some of the key objectives that the process could try to address are:
(1) Reconciling the product offering with market alternatives regularly to ensure that the Firm has a
competitive product mix
(2) Identifying customer segments or investment needs where the Firm could potentially have
difficulties in making recommendations in the best interest of the customer, due to the limited
nature of its product offering.
58
Please refer to the SEC Reg BI Small Entity Compliance Guide, 2019 for additional information.
59
Refer to FINRA Rule 2111 (Suitability) FAQ - https://www.finra.org/rules-guidance/key-topics/suitability/faq
57
(3) Identifying indicators for recommendation with facts and circumstances (e.g., type of customers,
product costs, product performance) that may warrant a higher-level of supervision
5.4.2. Prospecting
The Care Obligation also requires that the recommendations provided by the Firm match the retail
customer’s investment profile at the time of the recommendation. If a Firm decides to allow
recommendations to be made to prospective customers, Firms will have to ensure that the
representatives had enough information about the prospect to satisfy the Care Obligation. One option
Firms may wish to consider for implementation is the map the customer life cycle and identify what types
of recommendations may be made at what points along the life cycle. This may help to identify whether
controls are needed at such points to ensure the Care Obligation is satisfied.
5.4.3. IRA and IRA Rollovers
Reg BI is applicable to recommendations to open an IRA or to rollover workplace retirement plan assets
into an IRA rather than keeping assets in a previous employer’s workplace retirement plan or rolling over
assets to a new employer’s workplace retirement plan.
Factors that Broker-Dealers could consider when recommending to open IRA or to roll over assets to IRA
(Non-exhaustive list):
Broker-Dealers could consider a variety of factors, the importance of which will depend on the particular
retail customer’s needs and circumstances, including but not limited to:
(1) Retail customer’s investment profile
(2) Potential risks, rewards, and costs of the IRA or IRA rollover compared to the investor’s existing
employer sponsored retirement plans
(3) Other relevant factors such as: fees and expenses; level of service available; available investment
options; ability to take penalty-free withdrawals; application of required minimum distributions;
protection from creditors and legal judgments; holdings of employer stock; and any special
features of the existing account
With respect to IRA rollovers and available investment options, Broker-Dealers might also consider other
factors such as the retail customer’s current financial situation and liquidity needs in order to develop a
reasonable basis to believe that the rollover is in the retail customer’s best interest.
5.4.4. Account Type
Reg BI is applicable to recommendations of account types (e.g., brokerage or advisory)
Factors that Broker-Dealers can consider when recommending a type of account (non-exhaustive list):
o Services and products provided in the account (e.g., account monitoring services)
o Projected account cost to the retail customer
o Alternative account types available
o Services requested by the retail customer
o Retail customer’s investment profile
58
o Dual Registrants can also consider the spectrum of accounts offered (i.e., both brokerage and
advisory taking into account any eligibility requirements such as account minimums) and not just
brokerage accounts
5.4.5. Explicit and Implicit “hold” recommendations
FINRA’s suitability rule applies to explicit hold recommendations but does not apply to implicit
recommendations to hold a security or securities. In an enhancement to FINRA’s suitability rule, Reg BI
also applies to implicit hold recommendations resulting from agreed-upon account monitoring.
Explicit hold recommendation
An explicit hold recommendation refers to explicit recommendations to hold a security or to continue to
use an investment strategy involving securities or to continue to use an investment strategy involving
securities (e.g., when a registered representative meets (or otherwise communicates) with a customer
during a quarterly or annual investment review and explicitly advises the customer not to sell any
securities or make any changes to the account or portfolio or to continue to use an investment strategy).
Implicit hold recommendation
When a Broker-Dealer agrees with a retail customer to monitor their customer’s account, such agreed-
upon monitoring involves an implicit recommendation to hold (i.e., recommendation not to buy, sell, or
exchange assets pursuant to that securities account review) at the time agreed-upon monitoring occurs
and is covered by Reg BI.
When addressing implicit hold recommendations, Broker-Dealers could consider the following:
o Clearly communicating to customers in writing whether account monitoring services are or are not
provided to avoid an implicit agreement to monitor the customer’s account. Such communication
should be consistent with disclosures required under the Disclosure Obligation
o Identifying accounts where agreed-upon monitoring services are provided
o Documenting the account monitoring policies and procedures. For example, the policy may:
o Identify a benchmark (e.g., stop loss) for retaining the hold on a security
o Indicate that hold recommendations can be removed for underperforming investments
o Incorporate routine monitoring procedures and procedures to escalate deficiencies and the
required corrective actions
5.5. Documentation of specific recommendations
The Care Obligation does not require Broker-Dealers to document the basis for a recommendation. Broker-
Dealers are, however, encouraged to consider documentation based on the facts and circumstances of the
recommendation to evidence their compliance with the Care and Disclosure Obligations. Some of the
factors that the Firm could consider when developing its approach to documentation are:
o Risk-based process – Firms may want to establish a risk-based approach when determining whether
certain types of recommendations should be documented. For example, Firms could establish
defined guidelines that would help identify whether a recommendation should be categorized as
“high risk” or “complex”. Firms could then emphasize documentation for recommendations
59
involving a complex or riskier product and for circumstances where a recommendation may seem
inconsistent with a retail customer’s investment objectives on its face. Firms could also adopt a less
intensive document approach in cases where the recommendation rationale is less involved or is
not evident from the recommendation itself.
o Supervision – Firms may consider how well they can evidence the effectiveness of their supervisory
processes. Investment in enhanced supervisory processes and technologies may help Firm
substantiate meeting the Care Obligation, thereby, potentially, decreasing the need for
documentation of the basis for recommendations.
o Financial Advisor experience – Firms might consider the Financial Advisor experience in
development of processes for documenting the basis for recommendations. Streamlined and
automated processes that enable Financial Advisors to focus more on the customer and less on
administrative work are potentially additive; both to the Financial Advisor experience and the
Firm’s confidence in its ability to meet the Care Obligation.
5.6. Key Implementation Considerations from Section 5
Section 5 addressed requirements and implementation considerations for the Care Obligation. Below is a
summary of implementation considerations from this section. These considerations are neither exhaustive
nor prescriptive; rather, they are representative of the types of considerations that a Firm may find helpful
as it designs and executes on its Reg BI Program requirements.
Figure 12: Section 5 implementation considerations
60
6. Conflict of Interest Obligation
The Conflict of Interest Obligation aims to identify and address conflicts of interest, whether through
elimination or, at a minimum, disclosure. In addition to disclosure, certain identified conflicts of interest
are also required to be mitigated in order to comply with Reg BI. This Guide section will discuss the scope
and structure of Conflict of Interest Obligation and will separately describe the requirements and
considerations for disclosing, mitigating, and/or eliminating conflicts of interest.
6.1. Conflicts of interest catalog (types)
6.1.1.
Applicability of Conflict of Interest Obligation
Compliance with the Conflict of Interest Obligation is applicable only to the Broker-Dealer and not to natural
persons who are Associated Persons
60
of a Broker-Dealer. This differs from the Disclosure and Care
Obligations, which apply to both the Broker-Dealer and to natural persons who are Associated Persons of
the Broker-Dealer. Specifically, the customer-specific Care Obligation places a duty on the Broker-Dealer to
have a reasonable basis to believe that the recommendation was in the best interest of the retail customer
at the time of the recommendation, based on that retail customer’s investment profile (as defined by Reg
BI) and the potential risk, rewards, and costs associated with the recommendation, and did not place the
financial interest of the broker, dealer, or natural person ahead of the interest of the retail customer.
61
Similarly, in accordance with the Disclosure Obligation, Associated Persons of Broker-Dealers will be
required to disclose material facts relating to conflicts of interest that are associated with a
recommendation.
The term “Broker-Dealer” in this section means only the broker or dealer entity and excludes individuals,
who are Associated Persons of the Broker-Dealer, including:
(1) Any partner, officer, or director or branch manager of the broker or dealer;
(2) Any person directly or indirectly controlling, controlled by, or under common control with such
broker or dealer; or
(3) Any employee of the broker or dealer.
As described in the Reg BI adopting release, Broker-Dealers are expected to be the most capable of
identifying and addressing the conflicts that may affect the obligations of their Associated Persons with
respect to the recommendations they make, and therefore are in the best position, to affirmatively
reduce the potential effect of these conflicts of interest.
62
60
A “natural person who is an associated person” is a natural person who is an associated person as defined in Section 3(a) (18) of the Exchange
Act.
61
See Reg BI adopting release. Page 14. 2019.
62
See Reg BI adopting release. Page 326. 2019.
61
6.1.2. Conflicts of Interest under Reg BI
63,64
Reg BI defines the term “conflict of interest” as an interest that might incline a Broker-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.
Reg BI is not limited to specific Firm-level conflicts of interest. For the purposes of compliance with Reg BI,
Broker-Dealers will need to address all conflicts of interest that are associated with recommendations.
65
Specifically, the conflicts of interest that are required to be analyzed by a Broker-Dealer are as follows:
o Conflicts between the Broker-Dealer and the retail customer (Firm vs. Client);
o Conflicts between the natural persons who are Associated Persons and the retail customer
(Associated Person vs. Client); and
o Conflicts between the Broker-Dealer and the natural persons who are Associated Persons (Firm vs.
Associated Person).
In addition to the conflicts noted by Reg BI mentioned above, Firms may consider additional conflicts such
as conflicts between clients (e.g., IPO allocations or proprietary research or advice among different types
of customers).
Conflicts can arise in a number of ways for a Broker-Dealer and its individual Associate Persons. Some
examples of conflicts that may incentivize Broker-Dealer or its Associated Persons to deprioritize the
interests of its retail customers, are listed below:
o Charging of commissions or other transaction-based fees;
o Receipt and offer of differential compensation based on the product sold;
o Receipt of third-party compensation for services provided;
o Receipt of revenue-sharing payments;
o Recommendation of proprietary products, products of affiliates, or a limited range of products;
o Recommendation of a security underwritten by the Broker-Dealer or an affiliate of the Broker-
Dealer (including recommendation of IPOs);
o Recommendation for a transaction to be executed in a principal capacity;
o Allocation of trades and research, including allocation of investment opportunities (e.g. IPO
allocations or proprietary research or advice) between retail customers and the Broker-Dealer’s
own account; and/or
o Recommendations that are made considering the cost to the Broker-Dealer for effecting the
transaction or strategy on behalf of the customer.
63
See [Release No. 34-86031; File No. S7-07-18], Section II.C.3
64
See FINRA publication, Report on Conflicts of Interest (2013) which notes the implementation of a comprehensive framework by Broker-
Dealers to identify and manage conflicts of interest across and within Firms’ business lines that is scaled to the size and complexity of their
business.
65
See Reg BI adopting release. Page 15. 2019.
62
6.2. Conflict-related controls, policies and procedures
6.2.1.
Structure of Conflict of Interest Obligation
66,67
The Conflict of Interest Obligation is structured into two major requirements.
(1) An overarching obligation to establish, maintain and enforce written policies and procedures that
are reasonably designed to identify and at a minimum disclose (pursuant to the Disclosure
Obligation), or eliminate, all conflicts of interest associated with the recommendation; and
(2) Adoption of specific requirements with respect to such policies and procedures for the mitigation
or elimination of identified conflicts of interest
Broker-Dealers will be required to adopt reasonably designed policies and procedures that establish a
clearly defined and articulated structure for determining how to effectively identify and address conflicts
of interest (i.e., whether to eliminate or disclose (and mitigate, as required) the conflict); and setting forth
a process to help ensure that conflicts are effectively addressed as required by the policies and procedures.
Reg BI mandates a broad obligation on Broker-Dealers to address conflicts both at the Firm level and the
associated person level. There is an overarching obligation to identify and disclose, in accordance with the
Disclosure Obligation, all conflicts of interest associated with recommendations.
68
For situations in which
disclosure alone is not sufficient, Broker-Dealers may need to establish policies and procedures designed
to eliminate the conflict or both disclose and mitigate it. The approach to disclosure, mitigation and
elimination of conflicts of interest will be further discussed in the Guide.
66
See [Release No. 34-86031; File No. S7-07-18], Section II.C.3
67
See FINRA “Report on Conflicts of Interest” for guidance on Client vs. Client conflicts. 2013.
68
See Reg BI adopting release. Page 15. 2019.
63
A simplified overview of Conflict of Interest Obligation is illustrated in the below figure.
6.2.2. Considerations for adopting “reasonably designed” policies and procedures
69
The written policies and procedures adopted by Broker-Dealers will need to be “reasonably designed” to
ensure compliance with the requirements to disclose conflicts in accordance with the Disclosure Obligation
and to identify and address conflicts in accordance with the Conflict of Interest Obligation. The requirement
for “reasonably designed” policies and procedures is expected to allow the Broker-Dealer “to identify and
address potential compliance deficiencies or failures (such as inadequate or inaccurate policies and
procedures, or failure to follow the policies and procedures).”
70
Broker-Dealers are not mandated to perform a detailed review of each recommendation of a securities
transaction or security-related investment strategy to a retail customer. They are offered the flexibility to
tailor their policies and procedures to their particular business model, focusing on specific areas of their
business that pose the greatest risk of noncompliance and greatest risk of potential harm to retail
customers.
71
69
See [Release No. 34-86031; File No. S7-07-18], Section II.C.3.a
70
See Reg BI adopting release. Page 307. 2019.
71
See Reg BI adopting release. Pages 306-307. 2019.
Figure 13: Actions under Conflict of Interest Obligation
64
The components that may be considered for formulating reasonably designed policies and procedures, are
illustrated in the below figure.
6.2.3. Considerations for identification of conflicts of interest
72
Broker-Dealer compliance with the Conflict of Interest Obligation begins with the identification of all
conflicts of interest associated with recommendations.
The Reg BI adopting release lists certain considerations for reasonably designed policies and procedures
to identify conflicts of interest. Broker-Dealers may wish to consider the following checklist in order to
design policies and procedures to identify conflicts of interest:
o Do the policies and procedures define conflicts in a manner that is relevant to a Broker-Dealer’s
business models?
o Do the policies and procedures define conflicts at both the Firm-level and at the Associated
Person level?
73
o Do the policies and procedures enable Broker-Dealer’s employees to understand and identify
conflicts?
o Do the policies and procedures establish a structure and process for identifying the different
types of conflicts faced by the Broker-Dealer and its Associated Persons?
o Do the policies and procedures establish a structure and process to identify conflicts in a Broker-
Dealer’s business as it evolves?
72
See [Release No. 34-86031; File No. S7-07-18], Section II.C.3.c
73
See SEC commentary in Reg BI adopting release regarding its position on a safe harbor with FINRA rules regarding conflicts of interest. Pages
308, 328.
Figure 14: Potential components for formulating reasonably designed policies and procedures
65
o Do the policies and procedures provide for an ongoing and regular, periodic review for the
identification of conflicts associated with the Broker-Dealer’s business? For example,
o Conflicts of interest that arise due to changes in the Broker-Dealer’s business/organizational
structure;
o Conflicts of interest that arise due to changes in the Broker-Dealer’s changes in
compensation incentive structures; or
o Conflicts of interest that arise due to Broker-Dealer’s introduction of new or revised products
or services.
o Do the policies and procedures establish training procedures regarding the Broker-Dealer’s
conflicts of interest? For example,
o Training on conflicts of natural persons who are Associated Persons of the Broker-Dealer;
o Training to identify such conflicts of interest; or
o Training on employees’ roles and responsibilities with respect to identifying such conflicts of
interest.
6.3. Approach to disclosing, mitigating, or eliminating conflicts of interest
6.3.1.
Disclosure, mitigation, or elimination of Conflicts
Reg BI allows Firm-level conflicts to be generally addressed through disclosure by Broker-Dealers. However,
for certain conflicts, disclosure alone would not be sufficient, and Broker-Dealers would need to eliminate
the conflict, or both disclose and mitigate the conflict. An identified conflict of interest that is not eliminated
is required to be disclosed in accordance with Reg BI’s Disclosure Obligation. The disclosure requirements
for conflict of interest are discussed in Section 4 of this Guide. In addition, in certain situations, conflicts
must also be mitigated. The requirements to eliminate certain conflicts of interest, as defined by Reg BI,
are discussed in the subsequent sub-section.
While Firms should consider mitigating any conflicts that are likely to lead to a recommendation that is
disinterested, Reg BI specifically requires Broker-Dealers to identify and mitigate the following types of
conflicts:
o Conflicts due to incentives to Associated Persons of a Broker-Dealer; and
o Conflicts that arise due to material limitations placed on recommendations.
The below figure illustrates a representative logic for managing conflicts of interest in accordance with Reg
BI requirements.
66
Figure 15: An example decision tree to disclose, mitigate, or eliminate a conflict under Reg BI
Conflict of Interest Obligation
67
6.3.2. Elimination or disclosure of Conflicts
Any identified conflict of interest associated with a recommendation is required to be disclosed or
eliminated by Broker-Dealers. A logical flow for disclosing or eliminating any identified conflict of interest
that is associated with a recommendation is illustrated in the below figure:
Figure 16: An example decision tree to eliminate specific sales-related conflicts under Reg BI Conflict of
Interest Obligation
6.3.2.1. Mitigation of Certain Incentives to Associated Persons
74
Reg BI requires Broker-Dealers to establish, maintain, and enforce reasonably designed policies and
procedures to identify and mitigate any conflicts of interest that create an incentive for the Associated
Person to place the interest of the Broker-Dealer or such Associated Person ahead of the interest of the
retail customer. The table below outlines the scope of such mitigation efforts.
74
See [Release No. 34-86031; File No. S7-07-18], Section II.C.3.e
68
Table 11: Scope of the mitigation requirement for conflicts under Reg BI Conflict of Interest Obligation
Scope of the mitigation requirement for conflicts
Includes
Excludes
•
Conflicts of interest due to incentives provided
to associated persons by the Broker-Dealer
• Conflicts of interest due to incentives provided
to associated persons by third-parties that are
within the control of or associated with the
Broker-Dealer’s business
• Conflicts of interest due to sales contests
•
Conflicts of interest due to external interests of
the Associated Person, that is not within the
control of or associated with the Broker-
Dealer’s business
75
Firms are encouraged to review the examples provided by the SEC in the Reg BI adopting release as they
discern which conflicts of interests identified are required to be mitigated.
76
Additionally, Broker-Dealers may wish to consider the mitigation of conflicts that are related to the below
list of incentives for Associated Persons by the Firm or with third-parties within the control of or
associated with the Broker-Dealer’s business:
o Compensation from the Broker-Dealer or from third-parties, including fees and other charges for
the services provided and products sold;
o Employee compensation or employment incentives (e.g., incentives tied to asset accumulation,
special awards, differential or variable compensation, incentives tied to appraisals, or
performance reviews);
o Commissions or sales charges, or other fees or financial incentives, or differential or variable
compensation, whether paid by the retail customer, the Broker-Dealer or a third-party; and/or
o Compensation that varies based on the advice given, such as commissions, markups/markdowns,
loads, revenue sharing, and Rule 12b-1 fees.
Factors that may influence the mitigation measures that are to be included in the required policies and
procedures are outlined in the below figure.
75
For more information about this exclusion, please see page 329 of the Reg BI adopting release.
76
For further discussion, see Reg BI adopting release. Pages 329-330. 2019.
69
Figure 17: Factors that may influence the mitigation measures
Potential methods to mitigate conflicts due to incentives
Reg BI provides a list of potential mitigation methods that may be used as examples by Broker-Dealers to
comply with Reg BI’s requirement to mitigate conflicts that arise due to incentives to Associated Persons.
This non-exhaustive list of mitigation practices are as follows:
• Avoid compensation thresholds that disproportionately increase compensation through
incremental increases in sales;
• Minimize compensation incentives for employees to favor one type of account over another; or
to favor one type of product over another, proprietary or preferred provider products, or
comparable products sold on a principal basis;
• Eliminate compensation incentives within comparable product lines (e.g., mitigation by capping
the credit that an associated person may receive across mutual funds or other comparable
products across providers);
70
• Implement supervisory procedures to monitor recommendations that:
o Are near compensation payout thresholds;
o Are near thresholds for Firm recognition;
o Involve higher compensating products, proprietary products, or transactions in a principal
capacity;
o Involve the roll over or transfer of assets from one type of account to another (such as
recommendations to roll over or transfer assets in an ERISA account to an IRA) or from one
product class to another;
o Involve redemption fees, surrender charges, or other exit fees;
• Adjust compensation for associated persons who fail to adequately manage conflicts of interest;
and/or
• Limit the types of retail customer to whom a product, transaction, or strategy may be
recommended.
6.3.2.2. Mitigation of Material Limitations on Recommendations to Retail Customers
77
There is a provision in Reg BI that specifically addresses those conflicts of interest that are presented
when Broker-Dealers place any material limitations on the securities or investment strategies that may be
recommended to a retail customer.
The Reg BI adopting release provides guidance to Broker-Dealers to establish, maintain, and enforce
written policies and procedures reasonably designed to:
(1) Identify and disclose any material limitations Broker-Dealers place on their securities offerings or
investment strategies involving securities that may be recommended to a retail customer and any
associated conflicts of interest; and
(2) Prevent such limitations and associated conflicts of interest from causing the Broker-Dealer to
make recommendations that place the interest of the broker, dealer, or such natural person
ahead of the interest of the retail customer.
An example for material limitations that may be placed on recommendations to retail customers is
tabulated below.
Table 12: Example for material limitations on recommendations to retail customers
Example for material limitations on recommendations to retail customers
What can be considered as material limitations?
Conflict associated with material limitation
• Recommendation of only proprietary
products
• Recommendation of only a specific asset
class, or products with third-party
arrangements
• Recommendation of products from only a
select group of issuers
• Establishment of a product menu may
result in recommendations that are not in
the best interest of the retail customer
77
See [Release No. 34-86031; File No. S7-07-18], Section II.C.3.f
71
Any material
78
limitations placed on securities offerings or investment strategies involving securities that
may be recommended to a retail customer, and any conflicts of interest associated with such limitations,
are required to be disclosed by the Broker-Dealer in accordance with Reg BI’s Disclosure Obligation. For
example, when a Broker-Dealer intends to provide recommendations only for proprietary products, it
would need to disclose, the material limitation that the products on the menu are all proprietary, and the
material fact of the conflict of interest that the Broker-Dealer and its Associated Persons are being
compensated for selling these products. Additional details on the disclosure requirements are discussed
in Section 4 of this Guide.
Considerations for policies and procedures to mitigate conflicts due to material limitations
Reg BI adopting release provides considerations for developing policies and procedures to mitigate
conflicts due to material limitations placed on securities offerings or investment strategies involving
securities that may be recommended to a retail customer. These considerations are listed below.
(1) Establishment of product review processes for products that may be recommended
o Establishment of procedures for identifying and mitigating the conflicts of interests
associated with the product
o Establishment of procedures for declining to recommend a product where the Broker-Dealer
cannot effectively mitigate the conflict
o Establishment of procedures for identifying which retail customers would qualify for
recommendations from the product menu
(2) Usage of “preferred lists,” restricting the retail customers to whom a product may be sold,
prescribing minimum knowledge requirements for associated persons who may recommend
certain products
(3) Periodic product reviews to identify potential conflicts of interest, whether the measures
addressing conflicts are working as intended, and to modify the mitigation measures or product
selection accordingly
It is worth nothing that the Reg BI adopting release states that the disclosure of material limitations and
mitigation of associated conflicts, alone, will not excuse a Broker-Dealer from satisfying the Care
Obligation. In accordance with the facts-and-circumstances approach under the Care Obligation, if a
Broker-Dealer offers only a few products, an associated person of the Broker-Dealer may be expected to
understand and consider all of these offerings when recommending a security or investment strategy.
Similarly, a Broker-Dealer offering only proprietary products would need to consider reasonably available
alternatives offered to make recommendations that are in the best interest of the retail customer.
79
78
As discussed Section 3 or this Guide and in the Reg BI adopting release, a limitation is “material” if there is “a substantial likelihood that a
reasonable shareholder would consider it important.” Basic, Inc. v. Levinson, 485 U.S. 224, 224 (1988). Page 342. In the context of Reg BI, this
standard would apply in the context of retail customers.
79
For additional information about the scope of consideration of “reasonably available alternatives”, please see the Reg BI adopting release. Page
39. 2019.
72
6.3.3. Elimination of Conflicts
80
For those types of compensation or payment practices (cash and non-cash) where the associated conflicts
of interest are pervasive and cannot be reasonably mitigated, Reg BI
requires Broker-Dealers to eliminate
such conflicts in their entirety. Specifically, Reg BI requires Broker-Dealers to establish, maintain, and
enforce written policies and procedures reasonably designed to identify and eliminate any sales contests,
sales quotas, bonuses, and non-cash compensation
81
that are based on the sales of specific securities or
specific types of securities within a limited period of time.
82
Scope of elimination requirement
(1) The elimination requirement is applicable to sales contests, sales quotas, bonuses, and non-cash
compensation that are based on the sales of specific securities or specific types of securities
within a limited period of time. However, Broker-Dealers are not prohibited from providing such
incentives; they may still do so as long as that they do not create high-pressure situations to sell a
specifically identified type of security, within a limited period of time, such that the Associated
Person cannot make a recommendation in the retail customer’s best interest.
83
(2) The requirement only applies compensation practices based on sales of specific securities or
types of securities, and does not apply to, for example, total products sold, or asset growth or
accumulation and customer satisfaction.
84
Figure 18: Note on Care Obligation
85
80
See [Release No. 34-86031; File No. S7-07-18], Section II.C.3.g
81
Non-cash compensation includes but is not limited to merchandise, gifts and prizes, travel expenses, meals and lodging and excludes coverage
for certain employee benefits such as healthcare and retirement benefits. See [Release No. 34-86031; File No. S7-07-18], Section II.C.3.g
82
See Reg BI adopting release. Page 313. 2019.
83
See Reg BI adopting release. Page 352-353. 2019.
84
See Reg BI adopting release. Page 354. 2019.
85
See Reg BI adopting release. Pages 278-291. 2019.
Does disclosure, mitigation or elimination of conflicts ensure compliance with Care Obligation?
Any recommendation, disclosure, mitigation or elimination of conflicts aside, would still need to be in the
best interest of a retail customer, in accordance with the Care Obligation. For example, in a circumstance
where a Broker-Dealer (or its associated person) is choosing among identical securities with different cost
structures, it would be inconsistent with Reg BI to recommend the more expensive alternative for the
customer, even if the Broker-Dealer had disclosed that the product was higher cost and had policies and
procedures reasonably designed to mitigate the conflict under the Conflict of Interest Obligation, as the
Broker-Dealer would not have complied with the Care Obligation.
73
6.4. Considerations for the adoption and implementation of Conflict of Interest Obligation
Certain elements that may be considered by Broker-Dealers in governing and managing their conflicts of
interest, are listed below.
(1) Conflict of Interest Register: Broker-Dealers may consider maintaining a consolidated inventory of
all conflicts of interest that arise within the Firm and for its Associated Persons. Firms may wish to
catalog the different types of conflicts (e.g., conflicts due to compensation programs, conflicts
due to material limitations in recommendations, or conflicts due to non-cash benefits or
compensation) within and across business lines and maintain, periodically review, and update
such catalog. This repository of conflicts would provide a reference for Broker-Dealers for various
purposes, such as to design their conflicts of interest policies and procedures, to design their
compensation practices, and/or to adopt mitigation methods for Reg BI compliance.
(2) Model for conflict management: Depending on the size and business models of the Firm, Broker-
Dealers may choose to adopt a distributed or centralized model for management of conflicts. In a
centralized model, there would generally be single office or department having overall ownership
of conflict management. Large sized Firms or Firms with intricate business models may consider
adopting a distributed structure, in which there may be a compliance group or conflicts
committee within each business line or program to facilitate the governance of conflicts that are
unique to the business. Broker-Dealers might also consider a hybrid model by combining both
distributed and centralized management structures.
(3) Monitoring and surveillance systems: Broker-Dealers may need to review and evaluate their
existing systems and processes for conflict management. If the systems for monitoring and
surveillance are inadequate and sub-standard, management information on conflicts of interest
will likely be lacking, leaving the Broker-Dealer unable to identify and address potential conflicts
and eventually face the risk of non-compliance with Reg BI. Changes may be required to existing
control framework and supervisory systems to monitor for potential violations of policies and
procedures by natural persons who are Associated Persons.
(4) Existing regulatory infrastructure: Broker-Dealers may consider leveraging the existing compliance
infrastructure present in the organization. For example, dual Registrants may have an existing
control framework in place to disclose conflicts of interest in the Firm’s Form ADV, Part II. Such
existing practices may be leveraged and updated for the purposes of Reg BI Program compliance.
Similarly, Broker-Dealers who have an international presence may be able to learn from their
global member firms as to their experience in adopting similar rule requirements to Reg BI in
non-US regulatory regimes (if applicable). For example, the Markets in Financial Instruments
Directive (or Mifid II) requires investment firms in the United Kingdom to strengthen their
governance and organizational requirements in relation to management of conflicts of interest.
(5) Conduct: Broker-Dealers may consider cultivating a conduct culture within its Firm to promote
compliance and to set expectations for individual behavior across the organization’s hierarchy. A
culture of putting clients first can induce associated persons to “own” the risks and be
responsible for assessing and managing conflicts of interest for each recommendation made to a
74
retail customer. In addition, understanding the drivers of behaviors will allow Broker-Dealers to
identify areas requiring change in order to create appropriate behavioral incentives (for example,
supervisor and RR compensation practices, Firm revenue-sharing arrangements, etc.).
(6) Recruitment practices and compensation structures: Compliance with Reg BI post June 30, 2020
may result in Broker-Dealers modifying or eliminating some of their compensation practices. This
may result in a reduction in the overall compensation that an Associated Person currently
receives from providing recommendations. Broker-Dealer’s hiring practices could also be affected
due to change in offered benefits and remuneration. Other related considerations are as follows:
o Compensation committees may have earlier focused only on incentives offered to senior
executives. Cash and non-cash benefits and compensation to all associated persons of a
Broker-Dealer will need to be evaluated and reviewed to effectively comply with Reg BI.
o Broker-Dealers may have to involve their risk management and control personnel in the
design and development of their compensation programs.
o Third-party agreements and affiliate relationships may need to be evaluated to ensure that
any conflicts are identified and appropriately eliminated or disclosed, as needed.
o Performance metrics and goals for employed personnel may need to be evaluated and
updated such that there is no incentive for misconduct. The performance assessment process
for employees can be adjusted to include controls for Reg BI’s Conflict of Interest Obligation.
o Broker-Dealers may need to evaluate their hiring policies to ensure that they are rigorous
enough to avoid or mitigate the risk of the employment of Associated Persons with a
disciplinary history or problematic financial standing.
Existing employees and newly-hired individuals may need to undergo focused training to
recognize potential conflict situations, identify Firm-level and Associated Person-level
conflicts, and practice making decisions as to how to address such conflicts. Broker-Dealers
Broker-Dealers may also consider designing or revising their Codes of Ethics and Conducts for
their employees to explain conflicts under Reg BI, provide guidance for recognizing them, and
Firm resources to address any questions.
86
86
For RIAs, this is an explicit requirement under the Investment Advisers Act 204(A)-1.
75
(7) Products and services: To comply with the Conflict of Interest Obligation, Broker-Dealers may
need to evaluate existing products and services and potentially decide to expand or limit the
menu of securities offered to retail customers. Broker-Dealers may adjust their menu of
securities such that it results in more consistent product fees across comparable securities or
investment strategies. This has the potential to help reduce compliance costs for Reg BI purposes.
Broker-Dealers may also need to evaluate any new business or product planned to be introduced
for potential conflicts of interest. Some considerations to identify and manage conflicts of
interest for new products are as follows:
o The implementation of product review teams to identify and mitigate conflicts of interest
that may be associated with a new product;
o The evaluation of the suitability of the new product for recommendation to retail customers;
o The conducting of post-launch reviews of new products to identify potential compliance risks
and conflicts; and
o The training of employees required to understand the new product as well as the retail
customer base to which the new product may be recommended.
6.5. Key Implementation Considerations from Section 6
Section 6 addressed requirements and implementation considerations for the Conflict of Interest
Obligation. Below is a summary of implementation considerations from this section. These considerations
are neither exhaustive nor prescriptive; rather, they are representative of the types of considerations that
a Firm may find helpful as it designs and executes on its Reg BI Program requirements.
Figure 19: Section 6 implementation considerations
76
7. Compliance Obligation
7.1. Compliance Obligation Requirements
The Compliance Obligation
87
requires Broker-Dealers, in addition to the policies and procedures required
by the Conflict of Interest Obligation, to establish, maintain, and enforce written policies and procedures
reasonably designed to achieve compliance with Reg BI requirements.
The Compliance Obligation is intended to ensure that Broker-Dealers have a “strong systems of controls”
in place to detect and prevent violations of Reg BI
88
, in addition to the policies and procedures required
under Conflict of Interest Obligation, and to protect the interests of retail customers. Whether or not
policies and procedures are considered reasonably designed to comply with Reg BI Rule Package
requirements will depend on facts and circumstances, including the type of recommendation, the
complexity of the product or service recommended, and the sophistication of the retail customer.
The Compliance Obligation provides flexibility to formulate policies and procedures that address the
variety of business and operating models that exist and does not prescribe specific policies and
procedures required to be created. Firms are, therefore, encouraged to consider the size, complexity, and
associated risks in their business models and operations when developing policies and procedures to
meet their Reg BI Rule Package obligations. Other considerations may include suggestions outlined below:
Table 13: Considerations for Policies and Procedures
Component Obligation
Considerations for Policies and Procedures
Compliance Obligation
(General
Considerations)
• To what extent the Firm has standalone policies and procedures for
compliance, relevant sections within existing compliance manuals, or a
hybrid approach which considers a combination of the two.
• To what extent processes, controls, technology solutions, and/or training
materials created for previously-anticipated regulatory requirements (e.g.,
such as the DOL fiduciary rule) or existing state requirements (e.g., such as
the New York Regulation 187) may be leveraged for Reg BI Program
compliance purposes.
• The roles and responsibilities the key functional groups (e.g., product,
operations, technology, legal and compliance) to develop an integrated
approach to achieve Reg BI compliance.
• How and to what extent a Firm will evidence support for and maintain
documentation of recommendations made to retail customers.
• To what extent the Firm adopts changes to its business model and is
required to update its policies and procedures accordingly to
accommodate such changes (e.g., such as the launch of a new product or
service).
Disclosure Obligation
• The points across the customer life cycle (e.g., prospecting, onboarding,
rollover, and account type change) that require disclosure to retail
customers.
87
Refer to Compliance Obligation in Regulation Best Interest: The Broker-Dealer Standard of Conduct, https://www.sec.gov/rules/final/2019/34-
86031.pdf
88
See SEC Reg BI Adopting Release. Page 359. 2019.
77
Component Obligation
Considerations for Policies and Procedures
• The variety of media through which disclosures are made to retail
customers (e.g., in person, online, and marketing materials).
• The circumstances under which the Firm will allow supplemental oral
disclosures.
• The creation of Form CRS and the extent to which the Firm may wish to
implement layered disclosures.
• The extent to which existing disclosures may be updated to comply with
the Disclosure Obligation.
• The timing and frequency of disclosures made to retail customers.
• The extent to which the Firm allows its financial advisors to personalize
services (e.g., investment strategies).
Care Obligation
• How the Firm will define and operationalize “reasonable diligence, care,
and skill”, when making a recommendation.
• How the Firm will define and operationalize its definition of a “reasonable
basis” for making a recommendation and the associated costs of doing so.
• The extent to which the Firm will standardize its recommendation
processes vs. allowing financial advisors the flexibility to determine if a
recommendation is in the best interest of the retail customer.
• The complexity of the types of products and services offered, and the level
of due diligence, care, and skill that are required.
• The extent to which additional training is required for financial advisors as
they need to meet standards of care and conduct under Reg BI.
• The degree of documentation the Firm requires to demonstrate
compliance with the Care Obligation.
Conflict of Interest
Obligation
•
The extent to which the Firm will permit conflicts unique to an individual or
a subset of financial advisor(s) or registered representative(s).
• The material limitations that exist on products and services offered, and
the conflicts that these may generate (e.g., limited product menu).
• The extent to which proprietary products and services are offered and their
related conflicts.
• The complexity of conflicts and the ability of different customer segments
to understand these conflicts.
• The types of compensation and incentive plans that the Firm will permit
and the types of conflicts inherent to these plans.
• The way in which the Firm will decide to integrate conflicts-related policies
and procedures with the policies and procedures for reviewing and
updating of disclosures required under the Disclosure Obligation (if at all).
Requirements under the Disclosure Obligation, the Care Obligation, and the Conflict of Interest Obligation
are discussed in greater detail in Sections 4, 5, and 6, respectively, in this Guide.
As described in Section 4 of this Guide, Broker-Dealers and RIAs are required to provide a Form CRS to
retail customers, which is intended to inform retail investors about the types of relationships and services
the Firm offers; the fees, costs, conflicts of interest, and required standard of conduct associated with
such relationships and services; whether the Firm and its financial advisors currently have reportable legal
78
or disciplinary history; and how to obtain additional information about the Firm. Form CRS must also be
filed with the SEC. The requirements for Form CRS are described in greater detail in Section 4 of this
Guide; however, below are suggestions for Firms as they consider how to meet their compliance
obligations under the rule requirements:
Table 14: Considerations for compliance with the requirements of Form CRS
89
Ongoing delivery in this case is considered to be delivery as required by triggers as discussed in the Form CRS adopting release (e.g., to existing
customers who opens a new account or if material changes necessitate such delivery of an updated Form CRS).
Considerations for
compliance with the
requirements of Form
CRS may include:
Requirement Considerations (Non-Exhaustive)
Delivery
Initial Delivery to Existing Customers
• Firms are required to file the Form CRS with the Web CRD and/or the
IARD and as such may consider updating relevant policies and
procedures and designate appropriate staff for such filing.
• Firms are required to deliver Form CRS to existing clients within 30
days from the filing date noted above and as such may consider:
o Assessing the population of its existing customer accounts to
determine efforts required to meet initial delivery; and
o Automating delivery and enhancements to technology to
facilitate initial delivery.
Ongoing Delivery to Existing Customers
89
• Firms may consider the implementation of processes to comply with
the delivery requirements of the Form CRS for specific circumstances
as defined in the rule requirements, including:
o Automating delivery and enhancing technology systems to
facilitate such delivery;
o Leveraging alternative electronic delivery technologies to
reduce costs of such delivery
Delivery to New and Prospective Customers
• Firms may consider embedding delivery of Form CRS into its existing
customer relationship management (“CRM”) and customer account
onboarding processes and consider providing appropriate training to
staff that manage these processes.
• Firms may consider digital delivery options (e.g., online agreements).
Tracking and Instances of Non-Compliance
• In addition to establishing procedures to maintain records of delivery,
Firms may consider implementing and/or embedding processes to
track instances of non-compliance with the delivery requirements, as
well as steps to address delinquent client disclosures.
79
7.2. Potential framework for satisfying the Compliance Obligation
For Firms to satisfy the requirements of the Compliance Obligation, they should consider a design and
implementation of policies and procedures that are appropriate to their specific business models and
operations. The SEC recommends
91
that a reasonably designed compliance program generally would
include controls, processes for remediation of non-compliance, training, and periodic review and testing,
in addition to the requirement for policies and procedures to comply with Reg BI.
Below is an outline for a potential framework that Firms may choose to leverage as an aid to their design
and implementation of policies and procedures for satisfying the requirements of the Compliance
Obligation. The framework is staged in three phases: (1) a risk assessment, (2) a current-state gap
assessment, and (3) a target-state design.
7.2.1. Risk Assessment
Firms are encouraged to first perform a risk assessment to identify and evaluate the risk factors that may
cause a violation to Reg BI Rule Package requirements. The risk assessment will enable Firms to identify
risk factors specific to their business and operating models; it will also enable them to assess the levels of
inherent and residual risk in their businesses. Firms are encouraged to evaluate existing supervision and
surveillance processes as well as controls and compliance testing plan designs to understand and assess
the potential to mitigate identified risk factors as part of Reg BI Program implementation.
7.2.2. Current-State Assessment and Gap Analysis
Firms choosing to undergo a current-state gap assessment may wish to consider an assessment and
review of the business and operational changes that the Firm has decided to make as a result of Reg BI
Rule Package requirements, including the extent to which current policies and procedures should be
enhanced to support these changes. With this approach, Firms may be able to address prioritized
compliance risk factors in their business model and leverage existing policies and procedures where
possible to meet the Compliance Obligation, instead of creating new policies and procedures.
Firms should also consider assessing gaps in their current-state infrastructure and determine changes
that may be required to support their Reg BI compliance programs. This may include assessing and
determining changes required to current-state controls and technology as well as testing, training,
90
See SEC Form CRS Adopting Release. Page 187. 2019.
91
Refer to Section II C 4: Compliance Obligation in Regulation Best Interest: The Broker-Dealer Standard of Conduct,
https://www.sec.gov/rules/final/2019/34-86031.pdf
Content and Format
•
Firms may consider designating appropriate staff responsible for
preparing and updating the Form CRS consistent with the format
prescribed by the rule requirements.
• Firms may consider defining and documenting terms such as
“materially inaccurate.”
90
This may standardize the process for
determining when updates would be needed to the Form CRS.
• Registrants may consider reviewing existing disclosures to determine
if cross-referencing such information for Form CRS purposes is
appropriate.
80
monitoring, and remediation capabilities. It also may require enhancing policies and procedures of
various functions, including product, marketing, operations, and legal. The changes required to the
infrastructure to support a Reg BI compliance program will vary from Firm to Firm, depending on the
existing infrastructure, the complexity of the business, and the extent to which changes need to be made
to existing policies and procedures.
7.2.3. Target-State Design
In developing a target-state design, Firms may wish to determine the appropriate roles and
responsibilities for the lines of defense in their compliance programs. Below are suggested questions that
may aid Firms in assessing how they wish to design or modify such roles and responsibilities in their
organizations:
Product:
o How will the Firm assess the existing or new products on its product shelf?
o How will restrictions on products and investment strategies, such as proprietary products or
usage of preferred lists, be evaluated?
o Will the frequency or types of due diligence conducted in product reviews require changes?
Technology and Operations:
o How will policies and procedures need to change in response to the various functions impacted
by Reg BI?
o How will policies and procedures for account opening, client onboarding, and prospecting be
impacted?
o What new system integration considerations would be needed (e.g., CRM, order management
system, financial planning system, or investment compliance systems)?
Marketing:
o How will policies and procedures need to change to make the required disclosures in order
comply with Reg BI?
o What impact would there be on existing client-facing materials?
o Does the business currently provide recommendations digitally via online tools, such as investor
questionnaires? If so, what impact would Reg BI have on such recommendations? Do procedures
need to be updated to consider the timing and order of required disclosures across the customer
digital experience?
Supervision:
o What supervision responsibilities will be centralized with the home office vs. decentralized in the
branch offices?
o Will the supervisory model be risk-based, and what enhanced supervision processes will exist for
activities deemed to be of high risk (e.g., 401k rollovers or complex product recommendations)?
o Does the business currently have the technology systems, analytics capabilities, and tools
required to efficiently undertake their target-state supervisory roles and responsibilities?
o What enhancements to supervisory processes could be made with investment in automation?
o What new information or data inputs will supervision need to consume and synthesize to
evaluate recommendations being made to retail customers?
o What new training does the business and its representatives require to fulfill their roles and
responsibilities?
81
Surveillance:
o How will surveillance policies and procedures need to be modified for Reg BI compliance
purposes?
o What new trends and patterns will be monitored on an ongoing basis to help prevent and detect
compliance violations or emerging conflicts?
o What additional data and technologies will be required to implement the monitoring of trends
and patterns?
o To what extent will surveillance be centralized vs. decentralized and to what extent will it sit with
a second line vs. first line defense function?
o What information exchange and feedback will be required between supervision and surveillance
functions to sustain effective compliance oversight?
o When compliance issues are identified, what capabilities will the Firm require to evaluate,
escalate, and remediate these issues?
Testing
o How and with what frequency will the Firm test the effectiveness of its Reg BI Program policies,
procedures, and controls?
o What existing testing capabilities may be leveraged for Reg BI? How can existing capabilities be
enhanced with automation and investment in additional technologies?
o What metrics will the Firm develop to assess the effectiveness of its compliance program, and
what are the data inputs and sources required for these metrics?
o How will the Firm retain and evidence the testing of its compliance program?
o What testing will be performed by compliance vs. internal audit vs. risk management functions?
o Will the Firm engage service providers to assist in the design and execution of such testing?
Once a Firm has designed for target-state Reg BI compliance, it will likely develop an implementation plan
for such a compliance program. Firms may want to consider what resources might be leveraged across
pre-existing compliance efforts or business projects in order to optimize the cost efficiency and ease of
integration for such efforts. In this regard, Firms will likely need to consider the resources, skillsets, and
experiences needed for implementation and how to address any such gaps (e.g., additional hiring,
training, or engagement of external service providers). Firms should consider the impact of Reg BI
Compliance Obligation efforts on other Firm stakeholders, including a holistic review of potential impacts
on the Firm’s other compliance policies and procedures.
82
7.3. Key Implementation Considerations from Section 7
Section 7 addressed requirements and implementation considerations for the Compliance Obligation.
Below is a summary of implementation considerations from this section. These considerations are neither
exhaustive nor prescriptive; rather, they are representative of the types of considerations that a Firm may
find helpful as it designs and executes on its Reg BI Program requirements.
Figure 20: Section 7 implementation considerations
83
8. Recordkeeping Requirements
This section is intended to provide considerations for Firms as they implement the recordkeeping
requirements added in connection with the Reg BI Rule Package, potentially leveraging their recordkeeping
infrastructure and governance programs currently in place for existing regulatory requirements.
8.1. Existing recordkeeping requirements
Broker-Dealers and RIAs are currently required to create and preserve books and records (referred to
collectively hereafter as “records”) for their business and financial operations, among other things, in
accordance with regulatory requirements of the SEC, FINRA, and the Municipal Securities Rulemaking Board
(if applicable)
92
. The Securities Exchange Act Rules 17a-3 and 17a-4 define the recordkeeping requirements
for Broker-Dealers. Rule 17a-3 defines the records required to be created and preserved by Broker-Dealers,
and Rule 17a-4 defines the technical requirements for the maintenance and preservation of such records,
including the minimum retention period and the method of retention.
93
Dual Registrants are also subject
to the Investment Advisers Act Rule 204-2 which defines the recordkeeping requirements for RIAs.
While the population of records to be created and retained varies by Firm given the scope of products and
services offered and the Firm’s business model, the below table outlines common categories of records
that Broker-Dealers are required to create and retain under the existing rules (note: the examples are not
comprehensive).
Table 15: Records to be made and preserved by Broker-Dealers
Records to be Made and Preserved by Broker-
Dealers
94
Retention Period
Memoranda of Brokerage Orders and Dealer
Transactions
3 years (first 2 years in an accessible place)
Associated Person Location and Identification
Number Records
3 years after the Associated Person has
terminated employment and all other
connections with the Firm
Associated Person Compensation Records 3 years (first 2 years in an accessible place)
Associated Person Complaint Records 3 years (first 2 years in an accessible place)
Customer Account Records
6 years after account closure or the date on
which the information was replaced or updated
Communications with the Public 3 years (first 2 years in an accessible place)
Organizational Documents Life of the enterprise and any successor
Special Reports 3 years after the date of the report
92
FINRA requires Firms to create and preserve books and records as defined by the Exchange Act. For example, FINRA Rule 4511(c) requires
Firms to maintain books and records in compliant format with CFR 17a-4. As another example, for Firms governed by the MSRB, MRSB Rule G-8
requires such Broker-Dealers to maintain certain books and records.
93
See 17 CFR § 240.17a-3, 17 CFR 240.17a-4, and respective subsections. Under Rule 17a-4(f), Broker-Dealers are required to preserve electronic
records in a “Write Once Read Many” (“WORM”) format. Additionally, electronic records must meet other technical specifications, including
requirements for the duplication, indexing, and serialization of such records; for the presence of an audit trail for such records; and for the
verification, retrievability, and representation of such records.
94
FINRA Books and Records Requirements Checklist (https://www.finra.org/compliance-tools/books-and-records-checklist).
84
Records to be Made and Preserved by Broker-
Dealers
94
Retention Period
Compliance, Supervisory, and Procedures Manuals 3 years after the termination of use of manual
Exception Reports 18 months after the report was generated
As Firms implement compliance programs for Reg BI, Firms should consider where Reg BI may create record
creation and retention obligations that are in addition to or different than those that already exist under
current rules.
8.2. Reg BI and Form CRS recordkeeping requirements
The SEC amended Exchange Act Rules 17a-3 and 17a-4 to require firms to create and preserve records for
obligations imposed by Reg BI.
95
The below table outlines new recordkeeping requirements adopted in
connection with the Reg BI Rule Package. A discussion of considerations for implementation options will
follow in the subsequent section.
Table 16: Amendments to existing recordkeeping rules
Regulation
Amendments to Existing Recordkeeping Rules
Reg BI
§17a-3(a) (35)
For each retail customer to whom a recommendation of any securities transaction
or investment strategy involving securities is or will be provided:
(i) A record of all information collected from and provided to the retail customer…as
well as the identity of each natural person who is an associated person, if any,
responsible for the account.
§17a-4(e)(5)
All account record information required pursuant to § 240.17a-3(a) (17) and all
records required pursuant to § 240.17a-3(a) (35), in each case until at least six years
after the earlier of the date the account was closed or the date on which the
information was collected, provided, replaced, or updated.
Form CRS
§17a-3(a) (24)
A record of the date that each Form CRS was provided to each retail investor,
including any Form CRS provided before such retail investor opens an account.
§17a-4(e) (10)
All records required pursuant to §240.17a-3(a) (24), as well as a copy of each Form
CRS, until at least six years after such record or Form CRS is created.
§204-2(a)(14)(i)
Copy of each brochure, brochure supplement and Form CRS, and each amendment
or revision to the brochure, brochure supplement and Form CRS, that satisfies the
requirements of Part 2 or Part 3 of Form ADV, as applicable…[continued]… a record
of the dates that each brochure, brochure supplement and Form CRS, each
amendment or revision thereto, and each summary of material changes not
95
Rule 17a-3 was amended to include 17a-3(a) (35). Rule 17a-4 was amended to include 17a-4(e)(5).
85
Regulation
Amendments to Existing Recordkeeping Rules
contained in a brochure given to any client or to any prospective client who
subsequently becomes a client.
Firms are encouraged to review the SEC guidance provided in the Reg BI and Form CRS adopting releases
as to its expectations for Firm’s compliance with recordkeeping requirements for such purposes.
Additionally, Firms are encouraged to conduct an internal assessment, appropriate for its business model
and internal standards, to determine whether there are additional records or documentation that they
wish to maintain in an effort to evidence their compliance with the Reg BI Rule Package requirements.
8.3. A proposed framework for recordkeeping implementation
As Firms consider how best to approach implementation for Reg BI, a suggested step-wise approach for
Firms to assess the impact of Reg BI and Form CRS on their recordkeeping obligations is outlined below
(note: the recommendations are not comprehensive). This approach is not required for such an
assessment; rather, it has been created for convenience and for reference by Firms undergoing such an
exercise.
(1) Records Inventory: Firms will need to determine the population of records needed to be created
and retained based on rule amendments made to recordkeeping requirements in connection with
Reg BI and Form CRS in addition to existing recordkeeping requirements. It is recommended that
Firms define what documentation will be needed to satisfy such requirements for their purposes.
(2) Gap Analysis: For records identified in the Records Inventory stage, Firms will need to determine
whether gaps exist in their current recordkeeping obligations (i.e., determine if net new records
should be created for Reg BI and Form CRS purposes). Below are examples of records and other
documentation that Firms may consider maintaining as part of their overall Reg BI and Form CRS
compliance programs (note: the examples are not exhaustive):
o Record of each associated person, if any, responsible for the retail customer’s account
o Record of the date that each Form CRS was provided to each retail investor
o Documentation any such created or updated compliance policies and procedures
o Documentation of oral disclosures made to retail customers (if applicable)
o Documentation evidencing the training of financial advisors or Associated Persons on Reg BI
requirements
o Documentation of the Firm’s conflicts of interest register(s)
o Documentation of the Firm’s product review processes
o Documentation of decisions regarding the mitigation or elimination of certain conflicts of
interest
(3) Records Governance: Firms will need to determine the correct format and retention period for such
records identified above, including ensuring that such records meet the obligations of Rule 17a-4
(i.e., that records contained in electronic storage media are compliant with existing electronic
record storage standards).
86
8.4. Key Implementation Considerations from Section 8
Section 8 addressed requirements and implementation considerations for Recordkeeping. Below is a
summary of implementation considerations from this section. These considerations are neither exhaustive
nor prescriptive; rather, they are representative of the types of considerations that a Firm may find helpful
as it designs and executes on its Reg BI Program requirements.
Figure 21: Section 8 implementation considerations
87
