Reg BI and Form CRS

Regulatory Obligations and Related Considerations

Regulatory Obligations:

The SEC’s Regulation Best Interest (Reg BI) establishes a “best interest” standard of conduct for broker-dealers and associated persons when they make recommendations to retail customers of any securities transaction or investment strategy involving securities, including account recommendations. Pursuant to this standard, a broker-dealer and its associated persons must not put their financial or other interests ahead of the interests of a retail customer.

In addition, whether or not they make recommendations, firms that offer services to retail investors must provide them with a Form CRS, a brief relationship summary that discloses material information in plain language (e.g., investment services provided, fees, conflicts of interest, legal and disciplinary history of the firms and financial professionals).

Reg BI and Form CRS became effective on June 30, 2020, and 2021 marked the first full calendar year during which FINRA examined firms’ implementation of related obligations. The findings presented here are thus an initial look at firms’ practices. FINRA will share further findings as we continue to conduct exams and gather additional information on firms’ practices.

Related Considerations:

• When your firm determines whether it is obligated to comply with Reg BI, does your firm consider the following key definitions in the context of the rule?
  • “Retail customer” is defined as “a natural person, or the legal representative of such natural person, who:
    • receives a recommendation of any securities transaction or investment strategy involving securities from a broker-dealer; and
    • uses the recommendation primarily for personal, family, or household purposes.”
  • A retail customer “uses” a recommendation of a securities transaction or investment strategy involving securities when, as a result of the recommendation⁸:
    • the retail customer opens a brokerage account with the broker-dealer, regardless of whether the broker-dealer receives compensation;
    • the retail customer has an existing account with the broker-dealer and receives a recommendation from the broker-dealer, regardless of whether the broker-dealer receives or will receive compensation, directly or indirectly, as a result of that recommendation⁹; or
    • the broker-dealer receives or will receive compensation, directly or indirectly as a result of that recommendation, even if that retail customer does not have an account at the firm.
• Do your firm and your associated persons adhere to the Care Obligation of Reg BI when making recommendations by:
  • exercising reasonable diligence, care and skill to understand the potential risks, rewards and costs associated with a recommendation and having a reasonable basis to believe, based on that understanding, that the recommendation is in the best interest of at least some retail investors;
  • considering those risks, rewards and costs in light of the retail customer’s investment profile and having a reasonable basis to believe that a recommendation is in that particular customer’s best interest and does not place the broker-dealer’s interest ahead of the customer’s interest; and
  • having a reasonable basis to believe that a series of recommended transactions, even if in the retail customer’s best interest when viewed in isolation, is not excessive and is in the retail customer’s best interest when taken together in light of the retail customer’s investment profile?
• Do your firm and your associated persons consider costs and reasonably available alternatives when making recommendations to retail customers?
• Are your firm’s policies and procedures reasonably designed to identify and disclose or eliminate conflicts, as well as to mitigate conflicts that create an incentive for an associated person of the firm to place his or her interests or the interest of the firm ahead of the retail customer’s interest?
• How does your firm test its policies and procedures to determine if they are adequate and performing as expected?
• Does your firm place any material limitations on the securities or investment strategies involving securities that may be recommended to a retail customer? If so, does your firm identify and disclose such limitations and prevent those limitations from causing the firm or its associated persons to make recommendations that place the firm’s or associated person’s interests ahead of the retail customer’s interest?
• Are your firm’s policies and procedures reasonably designed to identify and eliminate sales contests, sales quotas, bonuses and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time, or mitigate conflicts for those not required to be eliminated?
• Do your firm’s disclosures include a full and fair disclosure of all material facts relating to the scope and terms of the firm’s relationship with retail customers (e.g., material fees and costs associated with transactions or accounts, material limitations involving securities recommendations) and all material facts relating to conflicts of interest that are associated with the recommendation?
• What controls does your firm have to assess whether disclosures are provided timely, and if provided electronically, in compliance with the SEC’s electronic delivery guidance?
• Do your firm’s policies and procedures address Reg BI, including new obligations that did not exist prior to Reg BI?
• Do your firm’s policies and procedures: (1) identify specific individual(s) who are responsible for supervising compliance with Reg BI; (2) specify the supervisory steps and reviews appropriate supervisor(s) should take and their frequency; and (3) note how supervisory reviews should be documented?
• If your firm is not dually registered as an investment adviser, commodity trading advisor, municipal advisor or advisor to a special entity, do the firm or any of its associated persons who are not dually registered use “adviser” or “advisor” in their name or title?  
• Does the firm provide dually-registered associated persons with adequate guidance on how to determine and disclose the capacity in which they are acting?
• Has your firm provided adequate Reg BI training to its associated persons, including supervisory staff?
• If your firm offers services to retail investors:
  • does it deliver Form CRS to each new or prospective customer who is a retail investor before the earliest of: (i) a recommendation of an account type, securities transaction or investment strategy involving securities; (ii) placing an order for the retail investor; or (iii) opening a brokerage account for the investor?
  • for existing retail investor customers, does the firm deliver Form CRS before or at the time the firm: (i) opens a new account that is different from the retail customer’s existing account; (ii) recommends that the retail customer roll over assets from a retirement account; or (iii) recommends or provides a new service or investment outside of a formal account (e.g., variable annuities or a first-time purchase of a direct-sold mutual fund through a ‘‘check and application’’ process)?
  • does it file a relationship summary with the SEC through the Central Registration Depository (CRD), if the firm is registered as a broker-dealer; through the Investment Adviser Registration Depository (IARD), if the firm is registered as an investment adviser; or both CRD and IARD, if the firm is a dual-registrant?
  • does your firm have processes in place to update and file the amended Form CRS within 30 days whenever any information becomes materially inaccurate and to communicate, without charge, any changes in the updated relationship summary to retail investors who are existing customers within 60 days after the updates are required to be made (a total of 90 days to communicate the changes to customers after the information becomes materially inaccurate)?

Exam Findings and Effective Practices

Exam Findings:

Reg BI and Form CRS

• WSPs That Are Not Reasonably Designed To Achieve Compliance with Reg BI and Form CRS –
  • Providing insufficiently precise guidance by:
    • not identifying the specific individuals responsible for supervising compliance with Reg BI; and
    • stating the rule requirements, but failing to detail how the firm will comply with those requirements (i.e., stating “what” but failing to address “how”).
  • Failing to modify existing policies and procedures to reflect Reg BI’s requirements by:
    • not addressing how costs and reasonably available alternatives should be considered when making recommendations;
    • not addressing recommendations of account types;
    • not addressing conflicts that create an incentive for associated persons to place their interest ahead of those of their customers; and
    • not including provisions to address Reg BI-related recordkeeping obligations and the testing of the firms’ Reg BI and Form CRS policies, procedures and controls.
  • Failing to develop adequate controls or developing adequate controls but not memorializing these processes in their WSPs.
• Inadequate Staff Training – Failing to adequately prepare associated persons to comply with the requirements of Reg BI beyond previous suitability obligations or Form CRS by:
  • failing to deliver initial training before the June 30, 2020, compliance date;
  • delivering training without making clear Reg BI’s new obligations; or
  • delivering training that focused on Reg BI and Form CRS requirements in general, without addressing the specific steps associated persons should take to comply with these requirements.
• Failure to Comply With Care Obligation –
  • Making recommendations that were not in the best interest of a particular retail customer based on that retail customer’s investment profile and the potential risks, rewards and costs associated with the recommendation.
  • Recommending a series of transactions that were excessive in light of a retail customer’s investment profile and placing the broker-dealer’s or associated person’s interest ahead of those of retail customers.
• Failure to Comply with Conflict of Interest Obligation – Not identifying conflicts or, if identified, not adequately addressing those conflicts.
• Improper Use of the Terms “Advisor” or “Adviser” – Associated persons, firms or both, using the terms “advisor” or “adviser” in their titles or firm names, even though they lack the appropriate registration.¹⁰
• Insufficient Reg BI Disclosures – Not providing retail customers with “full and fair” disclosures of all material facts related to the scope and terms of their relationship with these customers or related to conflicts of interest that are associated with the recommendation, including:
  • material fees received as a result of recommendations made (e.g., revenue sharing or other payments received from product providers or issuers, as well as other fees tied to recommendations to rollover qualified accounts);
  • potential conflicts of interest (e.g., associated persons trading in the same securities in their personal account(s) or outside employment); and
  • material limitations in securities offerings.

Form CRS

• Deficient Form CRS Filings – Firms’ Form CRS filings significantly departing from the Form CRS instructions or guidance from the SEC’s FAQ on Form CRS by:
  • exceeding prescribed page lengths;
  • omitting material facts (e.g., description of services offered; limitations of the firm’s investment services);
  • inaccurately representing their financial professionals’ disciplinary histories;
  • failing to describe types of compensation and compensation-related conflicts;
  • incorrectly stating that the firm does not provide recommendations;
  • changing or excluding language required by Form CRS; and
  • not resembling a relationship summary, as required by Form CRS.¹¹
• Form CRS Not Posted Properly on Website – For firms that have a public website, failing to post or failing to post prominently, in a location and format that is easily accessible to retail investors, the current Form CRS (e.g., requiring multiple click-throughs or using confusing descriptions to navigate to the Form CRS).
• Inadequate Form CRS Amendments – Firms not in compliance with Form CRS in relation to material changes because they:
  • failed to re-file in CRD in a timely manner (i.e., within 30 days of the date when Form CRS became materially inaccurate); or
  • failed to communicate or timely communicate changes to existing retail investor customers (e.g., delivering amended summary, with required exhibits, showing revised text or summarizing material changes or communicating the information through another disclosure within 60 days after the updates are required to be made—90 days total from the date when Form CRS became materially inaccurate).
• Misconstruing Obligation to File Form CRS –
  • Incorrectly determining that filing Form CRS hinges solely on making recommendations, rather than offering services to a retail investor.
  • Incorrectly claiming a firm is not subject to the Form CRS delivery obligation because of, among other things, their customer base (e.g., retail investors who are high-net-worth individuals) or the services they offer (e.g., investment company products held directly by an issuer, self-directed accounts)

Effective Practices:

• Identifying and Mitigating Conflicts of Interest – Identifying, disclosing, and eliminating or mitigating conflicts of interest across business lines, compensation arrangements, relationships or agreements with affiliates, and activities of their associated persons by:
  • establishing and implementing policies and procedures to identify and address conflicts of interest, such as through the use of conflicts committees or other mechanisms or creating conflicts matrices tailored to the specifics of the firm’s business that address, for example, conflicts across business lines and how to eliminate, mitigate or disclose those conflicts;
  • sampling recommended transactions to evaluate how costs and reasonably available alternatives were considered;
  • providing resources to associated persons making recommendations that account for reasonably available alternatives with comparable performance, risk and return that may be available at a lower cost, such as:
    • worksheets, in paper or electronic form, to compare costs and reasonably available alternatives; or
    • guidance on relevant factors to consider when evaluating reasonably available alternatives to a recommended product (e.g., similar investment types from the issuer; less complex or risky products available at the firm);
  • updating client relationship management (CRM) tools that automatically compare recommended products to reasonably available alternatives;
  • revising commission schedules within product types to flatten the percentage rate; and
  • broadly prohibiting all sales contests.
• Limiting High-Risk or Complex Investments for Retail Customers – Mitigating the risk of making recommendations that might not be in a retail customer’s best interest by:
  • establishing product review processes to identify and categorize risk and complexity levels for existing and new products;
  • limiting high-risk or complex product, transaction or strategy recommendations to specific customer types; and
  • applying heightened supervision to recommendations of high-risk or complex products.
• Implementing Systems Enhancements for Tracking Delivery of Required Customer Documents – Tracking and delivering Form CRS and Reg BI-related documents to retail investors and retail customers in a timely manner by:
  • automating tracking mechanisms to determine who received Form CRS and other relevant disclosures; and
  • memorializing delivery of required disclosures at the earliest triggering event.
• Implementing New Surveillance Processes – Monitoring associated persons’ compliance with Reg BI by:
  • conducting monthly reviews to confirm that their recommendations meet Care Obligation requirements, including system-driven alerts or trend criteria to identify:
    • account type or rollover recommendations that may be inconsistent with a customer’s best interest;
    • excessive trading; and
    • sale of same product(s) to a high number of retail customers;
  • monitoring communication channels (e.g., email, social media) to confirm that associated persons who were not investment adviser representatives (IARs) were not using the word “adviser” or “advisor” in their titles; and
  • incorporating Reg BI-specific reviews into the branch exam program as part of overall Reg BI compliance efforts, focusing on areas such as documenting Reg BI compliance and following the firms’ Reg BI protocols.

Additional Resources

• FINRA’s SEC Regulation Best Interest Key Topics Page
• SEC’s Regulation Best Interest Guidance Page 
• SEC’s Staff Statement Regarding Form CRS Disclosure
• 2021 FINRA Annual Conference: Regulation Best Interest and Form CRS: Recent Observations and What to Expect Panel
• 2021 Small Firm Virtual Conference: Regulation Best Interest and Form CRS Panel
• You may submit a question by email to [email protected]. Additionally, you may contact the SEC’s Division of Trading and Markets’ Office of Chief Counsel at (202) 551-5777.