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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.

Separately, whether they make recommendations or not, member firms that offer services to retail investors must file and provide retail investors with a Form CRS, a brief relationship summary that discloses material information about the firm 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 FINRA has been examining member firms’ implementation of related obligations throughout 2021—2022. FINRA will continue to share further findings as we continue to conduct exams and gather additional information on member firms’ practices.

Related Considerations

Care Obligation

  • When your firm makes a recommendation to a retail customer, does it exercise reasonable diligence, care and skill to:
    • understand the potential risks, rewards and costs associated with the recommendation;
    • form a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers; and
    • form a reasonable basis to believe that the recommendation is in the best interest of that particular retail customer by:
      • understanding and considering the potential risks, rewards and costs associated with the recommendation;
      • obtaining and analyzing sufficient information about the retail customer’s investment profile; and
      • considering a sufficient array of reasonably available alternatives, including lower cost or lower risk alternatives, if any, your firm offers?
  • Has your firm considered applying heightened scrutiny as to whether recommended investments that are high-risk, high-cost, complex or represent a high conflict of interest are in a retail customer’s best interest?
  • For recommendations of types of accounts, does your firm:
    • establish a reasonable understanding of the characteristics of a particular type of account by considering factors such as:
      • the services and products provided in the account (including ancillary services provided in conjunction with an account type, such as account monitoring services);
      • alternative account types available;
      • whether the account offers the services requested by the retail customer; and
      • whether these factors are consistent with the retail customer’s investment profile and stated investment goals?
    • consider the projected costs of the recommended account, including, for example, account fees (e.g., asset-based, engagement, hourly), commissions and transaction costs (e.g., markups and markdowns), tax considerations, as well as indirect costs, such as those associated with payment for order flow and cash sweep programs?
  • When making account rollover or transfer recommendations, including retirement accounts:
    • Does your firm ensure that it has a reasonable basis to believe that the rollover or transfer itself, the account type being recommended, and any securities or investment strategies recommended are in the retail customer’s best interest?
    • Does your firm consider, in addition to the general considerations for all account and securities recommendations, specific factors potentially relevant to rollovers or transfers, such as costs (e.g., costs associated with closing out securities, if the customer has to sell them as a result of the recommendation to transfer), level of services available, features of the existing account, available investment options, ability to take penalty-free withdrawals, application of required minimum distributions, protection from creditors and legal judgments, and holdings of employer stock?

Conflict of Interest Obligation

  • Are your firm’s policies and procedures reasonably designed to prevent your firm or its associated persons from placing their interests ahead of the retail customers’ interests by:
    • identifying and, at a minimum, disclosing or eliminating conflicts associated with recommendations;
    • identifying and mitigating (i.e., modifying practices to reduce) conflicts that create an incentive for an associated person of your firm to place his or her interests or the interest of your firm ahead of the retail customer’s interest;
    • identifying and disclosing any material limitations placed on the securities or investment strategies involving securities that may be recommended to a retail customer (e.g., only making recommendations of your firm’s proprietary products) and any conflicts of interest associated with such limitations, and preventing such limitations and associated conflicts of interest from causing your firm or its associated persons to make recommendations that place the interests of your firm or the associated persons ahead of the retail customers’ interests; and
    • identifying and eliminating 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?
  • With respect to account recommendations, does your firm consider the following non-exhaustive list of practices that can help your firm meet its obligations with respect to conflicts of interest by:
    • avoiding compensation thresholds that disproportionately increase compensation through openings of certain account types;
    • adopting and implementing policies and procedures reasonably designed to minimize or eliminate incentives, including both compensation and non-compensation incentives, for employees to favor one type of account over another;
    • implementing supervisory procedures to monitor recommendations that 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);
    • adjusting compensation for financial professionals who fail to adequately manage conflicts of interest associated with account recommendations?

Disclosure Obligation

  • Do your firm’s disclosures include full and fair disclosure of all material facts relating to the scope and terms of your firm’s relationship with retail customers (e.g., material fees and costs associated with transactions or accounts, material limitations involving securities recommendations, minimum account size required to open or maintain an account or establish a relationship, the investment approach, philosophy, or strategy that forms the general basis of your firm’s recommendations)?
  • Prior to, or at the time of the recommendation, has your firm provided full and fair disclosure to the retail customer regarding all material facts relating to conflicts of interest that are associated with the recommendation?
  • Does your firm have adequate controls to assess whether it provides disclosures in a timely manner, and, if provided electronically, in compliance with the SEC’s electronic delivery guidance?
  • Does your firm provide dually registered associated persons with adequate guidance on how to determine and disclose the capacity in which they are acting?
  • Do your associated persons supplement firm disclosures when appropriate (e.g., an associated person’s licensure only permits them to recommend a limited range of securities products offered by your firm, an associated person who is a dual-registrant disclosing the capacity in which he or she is acting at the time of the recommendation, an associated person has additional material conflicts of interest related to the recommendation beyond those disclosed by your firm)?
  • Do your associated persons periodically evaluate the materiality of any changes related to the scope and terms of their relationship with their customer to determine whether they are required to update the disclosures they provided to their retail customers?

Compliance Obligation

  • Are your firm’s policies and procedures tailored to address your firm’s business lines, products and services, and customer base?
  • Has your firm updated its existing policies and procedures to address all aspects of Reg BI, including aspects that go beyond suitability obligations (e.g., account-type recommendations, consideration of costs and reasonably available alternatives, elimination of the “control” element for assessing excessive trading, addressing conflicts, making required disclosures)?
  • Do your firm’s policies and procedures:
    • identify specific individual(s) who are responsible for supervising compliance with Reg BI;
    • specify the supervisory steps and reviews appropriate supervisor(s) should take and their frequency; and
    • note how supervisory reviews should be documented?
  • Does your firm evaluate and test the adequacy of its systems and controls considered to be critical in supporting compliance with Reg BI? For example:
    • How does your firm test its policies and procedures to determine if they are adequate and performing as expected?
    • Does your firm make enhancements to its supervisory system, procedures and processes based on feedback it has received from internal reviews, regulatory examinations or SEC and FINRA guidance concerning Reg BI compliance? If so, does your firm incorporate these enhancements into timely training provided to associated persons?
    • Does your firm continue to periodically re-evaluate its conflicts of interest, and the adequacy of its policies and procedures and related processes to prevent your firm from placing its interests ahead of the retail customer’s interests, in connection with changes to its product mix or business activities?
    • If your firm initially determined that it had no obligation to comply with Reg BI, has it periodically re-evaluated its initial determination in light of any changes to its business practices (i.e., making recommendations to retail customers)?
  • Has your firm considered how it will demonstrate (via documentation or otherwise) that it has met its obligations with respect to the basis for recommendations, particularly, though not exclusively:
    • recommendations of account types;
    • recommendations of complex, risky, or illiquid securities; or
    • recommendations that appear inconsistent with a retail customer’s investment profile?

Form CRS

  • Does your firm prominently post the current Form CRS on its website?
  • Does your firm periodically evaluate changes to its business mix or products or services offered, or otherwise periodically re-evaluate the accuracy of information (e.g., disciplinary history) in its Form CRS, to determine whether it is required to update and file an amended Form CRS? Does your firm have processes in place to communicate (without charge) any changes made to the Form CRS to retail investors who are existing customers?
  • How does your firm track and memorialize the delivery of Form CRS and Reg BI-related disclosure documents to retail investors and retail customers?

Findings and Effective Practices


Reg BI

  • Failure to Comply With Care Obligation:
    • Making recommendations of securities or investment strategies involving securities (including account type) without a reasonable basis to believe that they were in the best interest of a particular retail customer.
    • Recommending a series of transactions that were excessive in light of retail customers’ investment profiles and factors such as high cost-to-equity ratios and high turnover ratios.
    • Limiting consideration of cost solely to sales charges instead of also considering other relevant costs and fees, such as product- or account-level fees, when recommending a product.
    • Not maintaining profile information for retail customers in accordance with Exchange Act Rule 17a-3(a)(35), undermining the firm’s ability to demonstrate compliance with the Care obligation (e.g., not obtaining complete or current customer profile information for new or existing retail customers).
    • Failing to conduct a reasonable investigation of offerings prior to recommending them to retail customers (e.g., unable to reasonably evidence due diligence efforts regarding the issuer; relying solely on the firm’s past experience and knowledge with an issuer based on previously completed offerings).1
  • Failure to Comply with Conflict of Interest Obligation:
    • Not identifying conflicts and disclosing or, if necessary, eliminating conflicts of interest associated with recommendations of securities transactions or investment strategies involving securities.
    • Not identifying and mitigating (i.e., modifying practices to reduce) conflicts of interest that create an incentive for an associated person to make securities recommendations that place the interests of the associated person or the firm ahead of the interests of the retail customer, including:
      • not properly supervising or enforcing policy restrictions on certain types of recommendations (e.g., transactions in affiliated private funds) intended to mitigate or eliminate potential conflicts; and
      • not identifying and mitigating potential conflicts regarding revenue or fee sharing arrangements with fund managers for offerings that were recommended to retail customers.
    • Not identifying and addressing all potential conflicts of interest relevant to a firm’s business model, including, but not limited to, material limitations on securities or investment strategies and conflicts associated with these limitations.
  • Failure to Comply with Disclosure Obligation:
    • Not providing retail customers with “full and fair” disclosures of all material facts related to the scope and terms of their relationship with these retail 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;
      • material limitations in securities offerings; and
      • transaction-based fees that were inconsistent with—and, in some cases, materially higher than—those outlined in Reg BI customer disclosures.
    • Associated persons, firms, or both, improperly using the terms “advisor” or “adviser” in their titles or firm names, even though they lack the appropriate registration.
  • Failure to Comply with Compliance Obligation:
    • Failing to adopt and implement written policies and procedures that are reasonably designed to achieve compliance with Reg BI by:
      • not identifying the specific individuals responsible for supervising for compliance with Reg BI; and
      • stating the rule requirements but failing to identify how the firm will comply with those requirements (e.g., requiring associated persons to consider costs and reasonably available alternatives when making recommendations, but not specifically addressing or detailing how associated persons should do so).
    • Failing to modify existing policies and procedures to reflect Reg BI’s requirements by:
      • not tailoring these procedures to firms’ business models;
      • limiting the applicability of procedures to only specific types of recommendations to retail customers (e.g., those involving account rollovers) rather than all types of recommendations to retail customers of any securities transaction or investment strategy involving securities;
      • not addressing conflicts that create an incentive for associated persons to place their interest or the firm’s interest ahead of those of retail customers; and
      • not including provisions to address Reg BI-related recordkeeping obligations.
    • Failing to develop adequate controls or developing adequate controls but not memorializing these processes in their WSPs.
    • Failing to enforce Reg BI procedures or supervisory processes for compliance, such as outlining documentation requirements but failing to implement any process to confirm associated persons are complying with those requirements.
    • Failing to maintain sufficient systems or controls supporting firms’ ongoing trade surveillance to identify potential non-compliance with Reg BI, such as relying on manual review methods that were inconsistently performed or controls that were not reasonable given firms’ volume of transactions.
    • Failing to conduct adequate or ongoing training of associated persons regarding the use of systems and processes established to support Reg BI compliance.
    • Failing to ensure that recommendations involving variable annuities were compliant with Reg BI (e.g., not adequately collecting and retaining key information on variable annuity transactions, and not sufficiently training registered representatives and supervisors to determine whether variable annuity exchanges complied with the standards of Reg BI).2

Form CRS

  • Deficient Form CRS Filings: Firms’ Form CRS filings significantly departing from the Form CRS instructions or SEC guidance by:
    • exceeding prescribed page lengths;
    • omitting material facts (e.g., description of services offered, limitations of the firm’s investment services, incomplete or inaccurate cost disclosures);
    • inaccurately representing the firm’s or its financial professionals’ disciplinary histories, including inappropriate qualifying language to explain disciplinary history;
    • 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.3
  • Failing to Properly Deliver Form CRS: Failing to deliver or not creating a record of the date on which your firm provided each Form CRS to each retail investor, including any Form CRS provided before such retail investor opened an account.
  • Failing to Properly Post Form CRS: 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).
  • Failing to Adequately Amend Form CRS: Firms not in compliance with Form CRS in relation to material changes because they:
    • failed to timely re-file in CRD (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 and Deliver Form CRS
    • Incorrectly assuming that the requirement to file and deliver a Form CRS hinges solely on making recommendations, rather than also when placing an order or opening a brokerage account for a retail investor.
    • Incorrectly assuming 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., selling investment company products held directly by an issuer, self-directed accounts).

Effective Practices

Care Obligation

  • Costs and Reasonably Available Alternatives: Including in procedures and processes specific factors related to evaluating costs and reasonably available alternatives to recommended products, including but not limited to:
    • outlining firm documentation practices;
    • discussing limitations on complex or higher-risk products, such as firm concentration guidelines or minimum liquid net worth requirements;
    • clear supervisory processes that address reviews and documentation required by principals;
    • sampling recommended transactions to evaluate how costs and reasonably available alternatives were considered;
    • providing clear guidance to associated persons making recommendations on how to evaluate costs and reasonably available alternatives, such as by:
      • using worksheets, in paper or electronic form, to compare costs and reasonably available alternatives; or
      • specifying the relevant factors to consider when evaluating costs (e.g., deferred sales charges) and reasonably available alternatives (e.g., similar investment types from the issuer or less complex or risky products available at the firm); and
    • updating client relationship management (CRM) tools that automatically compare recommended products to reasonably available alternatives.
  • Heightened Scrutiny of 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; and
    • applying heightened supervision to recommendations of products, or investment strategies involving securities, that are high-risk, high-cost, complex or represent a high conflict of interest, or limiting such recommendations to specific customer types.

Conflict of Interest Obligation

  • Policies and Procedures: Establishing and implementing policies and procedures to address conflicts of interest across business lines, compensation arrangements, relationships or agreements with affiliates, and activities of their associated persons by:
    • using 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;
    • revising commission schedules for recommendations within product types to flatten the percentage payout rate to employees; and
    • broadly prohibiting all sales contests, regardless of whether they are based on the sale of specific securities, or specific types of securities, within a limited period of time.

Disclosure Obligation

  • 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 evidence delivery of Form CRS and other relevant disclosures; and
    • memorializing delivery of required disclosures at the earliest triggering event.

Compliance Obligation

  • Implementing New Surveillance Processes: Monitoring associated persons’ compliance with Reg BI by:
    • conducting at least monthly reviews to confirm that their recommendations meet Care Obligation requirements, including system-driven alerts or trend criteria to identify:
      • account type or rollover or transfer recommendations that may be inconsistent with a retail customer’s best interest;
      • products that are high-risk, high-cost, complex or represent a high conflict of 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.
  • Incorporating Reg BI-specific reviews into the branch exam program, in addition to other ongoing monitoring and surveillance.
  • Focusing on areas such as documenting Reg BI compliance and following the firms’ Reg BI protocols (as part of overall Reg BI compliance efforts).

Additional Resources

1 See the Report’s Private Placements section for additional findings related to firms recommending private offerings without having a reasonable basis.

2 See the Report’s Variable Annuities section for additional findings related to firms not reasonably supervising variable annuities recommendations for compliance with Reg BI.

3 See the SEC’s December 17, 2021, Staff Statement Regarding Form CRS Disclosures for additional observations.